________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 1-10395
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FIRST BRANDS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1171404
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
83 WOOSTER HEIGHTS ROAD
BUILDING 301, P.O. BOX 1911
DANBURY, CONNECTICUT 06813-1911
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(203) 731-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------- ---------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
At September 1, 1998, the number of shares outstanding of the registrant's
common stock was 39,045,100 (par value $.01), and the aggregate market value of
the voting stock held by non-affiliates was $779,490,470.
DOCUMENTS INCORPORATED BY REFERENCE
Registrants Proxy Statement for the Annual Stockholders Meeting to be held
October 23, 1998 is incorporated by reference for Part III
________________________________________________________________________________
TABLE OF CONTENTS
PAGE
----
PART I
Item 1: Business....................................................................................... 1
Item 2: Properties..................................................................................... 4
Item 3: Legal Proceedings.............................................................................. 5
Item 4: Submission of Matters to a Vote of Security Holders............................................ 5
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.......................... 5
Item 6: Selected Financial Data........................................................................ 6
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 7
Item 8: Financial Statements and Supplementary Data.................................................... 11
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 11
PART III
Item 10: Directors and Executive Officers of the Registrant............................................. 12
Item 11: Executive Compensation......................................................................... 14
Item 12: Security Ownership of Certain Beneficial Owners and Management................................. 14
Item 13: Certain Relationships and Related Transactions................................................. 14
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 15
Signatures................................................................................................ 35
ITEM 1 -- BUSINESS
First Brands Corporation ('First Brands' or 'the Company'), a Delaware
corporation, was organized in March, 1986 to acquire the worldwide home and
automotive products business of Union Carbide Corporation ('Union Carbide') in a
leveraged buy out which was effective as of July 1, 1986. Subsequent to an
initial and secondary stock offering, the Company became an publicly traded
corporation on March 27, 1991. The Company is primarily engaged in the
development, manufacture, marketing and sale of branded and private label
consumer products for the household and automotive markets. The Company's
products can be found in large merchandise and chain supermarkets and other
retail outlets. The Company believes that the significant market positions
occupied by its products are attributable to brand name recognition, a
comprehensive offering of quality products, continued product innovation, strong
emphasis on vendor support and aggressive advertising and promotion.
PRODUCTS
Household products include the most complete line of branded plastic wrap,
bags and drinking straws which are sold under the GLAD and GLAD-LOCK brands
along with the GLADWARE brand of plastic storage containers. In the Canadian
market, plastic bags are also sold under the SURTEC brand, and in Australia and
New Zealand, plastic wrap and bags as well as aluminum foils are also sold under
the OSO brand. In the Australian and New Zealand market, the Company sells
wiping cloths and scouring pads under the CHUX brand. On July 2, 1998, the
Company entered into an agreement to purchase the HANDI-WIPES and WASH'N DRI
brand cloths from the Colgate-Palmolive Company. This acquisition is expected to
be completed during the first quarter of fiscal 1999. In the North American
market, household products also include the STARTERLOGG and HEARTHLOGG brands of
wood fire starters and fire logs. Cat litter products are sold in the U.S. and
various countries under the SCOOP AWAY, EVER CLEAN, JONNY CAT and EVERFRESH
brands. Automotive performance and appearance products are sold worldwide under
the STP brand.
A&M Products, Inc. ('A&M'), a wholly owned subsidiary, manufactures and
markets SCOOP AWAY, EVER CLEAN and EVERFRESH cat litter, the leading brands of
clumping cat litter in the United States. A&M also produces and markets the
JONNY CAT brand of traditional cat litter along with other premium cat care
products.
In March, 1996 the Company purchased substantially all of the assets and
assumed the liabilities of Forest Technology Corporation ('Forest Technology').
Forest Technology manufactures and markets STARTERLOGG, the leading brand of
wood starter fire products, and HEARTHLOGG fire logs.
Through its subsidiary, Himolene Incorporated ('Himolene'), the Company is
a leading producer in the United States of high molecular weight, high density
polyethylene plastic trash can liners for the institutional and industrial
markets.
In March 1997, the Company purchased, for approximately $160,000,000, the
NationalPak business in Australia and New Zealand from National Foods Limited.
NationalPak manufactures and markets consumer products such as plastic wrap and
bags, cleaning cloths and aluminum foil under the GLAD, CHUX, OSO, MONO and ROTA
brand names. The acquisition was funded by long-term borrowings in the United
States, Canada, Australia and New Zealand. During the third quarter of fiscal
1998, the Company's New Zealand subsidiary acquired the XLO sponge brand in the
New Zealand market. During fiscal 1998, the Company sold to local management a
4.4% interest in the Australian subsidiary and, during fiscal 1999, expects to
finalize the sale to local management of a 1.6% interest in the New Zealand
subsidiary.
First Brands operates in foreign countries through subsidiaries in
Australia, New Zealand, Canada, South Africa, Zimbabwe, the United Kingdom,
Spain, Hong Kong, China, Mexico, Puerto Rico and the Philippines. In addition to
its foreign operations, First Brands exports to over one hundred countries and
its products are sold in twelve languages. Through its Hong Kong subsidiary,
First Brands holds a 51% interest in a joint venture in China which is engaged
in the manufacture and sale of both plastic wrap and bags and automotive
products. The Company's South African business owns 76% of the outstanding stock
of Sealapac (PVT) Ltd., a Zimbabwe manufacturer and marketer of plastic film
products for consumers and the packaging industry.
1
On December 26, 1996 the Company sold its SIMONIZ wax and polish business
to Syndet Products Incorporated. The impact of the divestiture did not have a
material effect on the Company.
The following represents the Company's sales by class of products:
First Brands Corporation and Subsidiaries
SALES BY CLASS OF PRODUCTS
1998 1997 1996
--------------------- --------------------- ---------------------
(Dollars in thousands) Dollars Percent Dollars Percent Dollars Percent
- ---------------------------------------------------------------------------------------------------
Household Products $ 824,798 69% $ 747,939 67% $ 693,406 65%
Automotive Products 206,392 17 212,467 19 213,900 19
Pet Products 172,480 14 156,858 14 149,186 14
Divested/Discontinued
Products(1) -- -- 2,634 -- 16,530 2
- ---------------------------------------------------------------------------------------------------
$1,203,670 100% $1,119,898 100% $1,073,022 100%
===================================================================================================
(1)Represents sales from the divested Simoniz business (December, 1996) and
sales from the phased-out Contract Packaging business and associated operations
which related to the divested Prestone business.
MANUFACTURING AND DISTRIBUTION
In general First Brands does not produce against a backlog of firm orders.
Production is geared primarily to the level of incoming orders and to
projections of future demand. Sufficient inventories of finished products,
work-in-process and raw materials are maintained to meet delivery requirements
of customers and First Brands production schedules.
There is no significant seasonal fluctuation in sales of the Company's
home, automotive, cat litter, institutional and industrial products. However,
the majority of fire starter and fire log sales occur during the first half of
the Company's fiscal year due to strong consumer demand during the fall and
winter months.
The Company's products are sold directly to retailers and to wholesalers
and can be found in large mass merchandise stores and chain supermarkets as well
as other retail outlets, including automotive supply stores, grocery stores and
price clubs. While the Company's sales are not dependent upon a single customer,
the top 25 customers account for approximately 45% of total sales, and sales to
its largest customer, the Wal-Mart Stores and Sams Wholesale Club stores, are
approximately 12% of total sales.
In the United States, sales to food outlets, which account for
approximately 64% of domestic sales of plastic wrap and bags as well as cat
litter, are handled through a network of brokers; sales to mass merchandisers
are handled by First Brands' direct sales force. Sales of automotive products
are primarily handled through First Brands' direct sales force and sold to auto
supply outlets and mass merchandisers. Himolene's sales to the institutional and
industrial markets are handled by that subsidiary's direct sales force as well
as through distributors. Sales of the Company's products in Canada are generally
handled in the same manner as U.S. sales, while sales in the Australian and New
Zealand markets are primarily handled by a direct sales force. Other
international sales are handled primarily through distributors.
The Company believes its manufacturing facilities employ state-of-the-art
technology. The plastic wrap and bag manufacturing process employs advanced
extrusion and conversion technologies. The Company's strategy is to update and
expand its manufacturing facilities with internally developed technologies (some
of which are patented) and state-of-the-art technology acquired from third-party
sources. To maintain its leadership as a flexible, low cost producer, certain
products sold by the Company, both domestically and internationally, are
produced by outside packagers. Each of these 'contract packagers' adhere to
strict quality control parameters and produce in accordance with production
schedules established by the Company. Through improvements in existing process
technologies and the acquisition of additional equipment the Company continually
strives to enhance its production capacity and efficiency.
RAW MATERIALS AND OTHER SUPPLIES
The Company currently purchases a substantial portion of its plastic wrap
and bags raw materials pursuant to a long-term polyethylene resin requirements
contract with Union Carbide which runs through December 31, 1999. Union Carbide
is the Company's largest single supplier and the Company believes that it is
also Union Carbide's largest customer for polyethylene resin. The Company also
has contracts for the purchase of certain raw materials, including polyethylene
resin, from other suppliers, and also makes purchases on the open market. The
pricing provisions in the Company's present supply contracts are designed to be
responsive to market conditions and the cost of relevant raw materials.
Although the Company believes that, based on industry estimates and
projections, raw material costs will, over the long-term on average, remain
relatively stable, it is unable to predict with any certainty its costs of raw
materials on a month by month basis which may, because of market conditions, be
materially higher or lower than those experienced in past periods. To the extent
raw material costs are higher, the Company's margins on the relevant products
could be adversely affected if it is unable to increase prices, effect
offsetting cost savings, or reduce prices to meet competition. As a consequence,
the Company may be adversely affected by changes in raw material markets. The
Company from time
2
to time has the ability to fix its prices on raw materials either through
agreements with suppliers, or through financial commodity-based contracts. The
Company has entered into to various contracts which fix the price of
approximately 37% of its domestic polyethylene resin requirements and has
another contract covering approximately 20% of its domestic requirements is a
financial collar. The Company believes that, if there were an industry-wide
shortage of raw materials, it might enjoy a competitive advantage over certain
of its competitors as a result of its assured source of supply for a substantial
portion of its raw materials.
Most of the raw materials used by First Brands' home and automotive
businesses are petrochemical derivatives primarily produced from ethylene and
refined oil which in turn is largely produced from natural gas in the United
States and Canada. Historically, petrochemical and refined oil derivatives have
been subject to price fluctuations due to various factors. There can be no
assurances that future events will not precipitate price increases. The factors
which will affect the cost of raw materials to the Company will generally affect
competitors' raw material costs as well. However, because several of the
Company's major competitors are units of vertically integrated enterprises or
part of the much larger and financially stronger entities, with the ability to
vary internal pricing arrangements in order to mitigate, adverse movements in
raw material prices, they may enjoy a competitive advantage in their end product
markets.
Most other raw materials are generally available in the marketplace and
First Brands believes that it has contracts and commitments, or a readily
available source of supply, to meet its anticipated needs in all major product
areas.
EMPLOYEES
First Brands currently employs approximately 4,800 persons worldwide, of
which about 3,200 are in the United States. The Company's employees are not
unionized with the exception of approximately 450 hourly workers at one domestic
plastic wrap and bag plant who are represented by the United Paperworkers
International Union ('UPI Union'), and approximately 625 international
employees. The contract with the UPI Union runs through November, 1999. The
Company has not experienced any significant interruptions or curtailments of
operations due to labor disputes, and considers its labor relations to be
satisfactory.
COMPETITION
First Brands operates in highly competitive markets where success is
dependent upon brand recognition, product innovation and performance, and price.
In several instances, the competitors are larger, more integrated companies with
greater financial resources than First Brands.
ENVIRONMENTAL MATTERS
Certain of the Company's operations are subject to federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. During fiscal 1998, 1997 and
1996, First Brands made expenditures of approximately $1,646,000, $1,818,000,
and $1,330,000, respectively, for environmental compliance at its facilities,
and currently estimates that it will make expenditures for environmental
compliance of approximately $1,800,000 in fiscal 1999. The Company believes that
it is in substantial compliance with all applicable environmental laws and
regulations.
RESEARCH AND DEVELOPMENT
Through research and development, management is committed to developing
process technologies and new products which are critical to the Company's
objective of providing high quality, innovative consumer products at costs which
the Company believes are equal to or less than those of its competitors. To
achieve these objectives, the Company operates two research and development
facilities, each outfitted with state-of-the-art machinery and equipment. The
Company spent $4,778,000, $5,043,000, and $4,789,000 during fiscal 1998, 1997
and 1996, respectively, on research and development.
Through the use of its high molecular weight, high density polyethylene
technology, First Brands and Himolene produce stronger plastic bags with less
raw material, resulting in a conservation of
3
resources and a reduction of materials that eventually go into landfills. The
Company presently uses recycled plastic trimmings, post consumer recycled
material and scrap in its GLAD and STP manufacturing facilities. Packaging for
all GLAD products is made with paperboard containing reclaimed material.
ITEM 2 -- PROPERTIES
First Brands uses various owned or leased plants, technical facilities,
warehouses, distribution centers and offices in the United States, Puerto Rico,
Australia, New Zealand, Canada, South Africa, Zimbabwe, Hong Kong, China,
Mexico, the United Kingdom, Spain and the Philippines. The Company's world
headquarters is located in Danbury, Connecticut.
First Brands believes current facilities, together with planned
expenditures for normal maintenance, capacity and technological improvements,
will provide adequate production capacity to meet expected demand for its
products. Management believes that First Brands' properties and those of its
subsidiaries are in good operating condition and are suitable for the purposes
for which they are being used.
Listed below are the principal manufacturing facilities operated by First
Brands and its consolidated subsidiaries worldwide during fiscal 1998:
LOCATION CITY PRINCIPAL PRODUCTS
-------- ----- -----------------
Domestic
Arkansas Rogers Plastic wrap and bags
California Bell Plastic bags
California Taft Cat litter
Georgia Cartersville Plastic wrap and bags
Georgia Wrens Cat litter
Illinois West Chicago Plastic bags
Kansas Spring Hill Cat litter
Mississippi Tupelo Plastic bags
New Jersey Paulsboro Auto specialty products
Ohio Akron Fire starters and fire logs
Ohio Painesville Auto specialty products
Vermont Rutland Plastic bags
Virginia Amherst Plastic wrap and bags
International
Australia Padstow, NSW Plastic wrap and bags
Canada Orangeville Plastic wrap and bags
China Conghua Plastic wrap and bags and auto
specialty products
New Zealand Auckland Plastic wrap and bags
Philippines Manila Auto specialty products
South Africa Babelegi Plastic wrap and bags
South Africa Cape Town Plastic film products
Wales Rassau Auto specialty products
Zimbabwe Harare Plastic film products
Domestically, the West Chicago, Illinois, Bell, California and Akron, Ohio
plants are leased facilities, with terms which expire between 1999 and 2008.
Internationally, the New Zealand, Philippine, South African, Welsh and
Zimbabwian production facilities are leased from third parties, with lease terms
expiring between 1999 and 2016. All other production plants are owned by the
Company or its wholly-owned subsidiaries.
First Brands maintains research and development facilities for its home
products and litter businesses in Willowbrook, Illinois, and for its automotive
products in Brookfield, Connecticut; both facilities are under lease with terms
expiring in 2008 and 2012, respectively. In addition to the properties
referenced above, First Brands maintains numerous domestic and international
administrative and sales offices and warehouses. The majority of these premises
are either leased under relatively short-term leases or owned.
4
ITEM 3 -- LEGAL PROCEEDINGS
The Company is subject to various claims, and contingencies related to
lawsuits, taxes, environmental and other matters arising out of the normal
course of business. Management believes that the ultimate liability, if any,
arising from these and other claims and contingencies is not likely to have a
material adverse effect on the Company's annual results of operations or
financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York, Philadelphia, Midwest
and Pacific Stock Exchanges under the symbol 'FBR'. The following table sets
forth the high and low sales price per share of the Common Stock during the
fiscal periods indicated as reported by the NYSE and the dividend per share paid
during such fiscal periods. The approximate number of holders of Common Stock of
record as of June 30, 1998 was 622.
HIGH LOW DIVIDEND
---- ---- --------
Fiscal 1998
First Quarter................................................................. 28 1/2 20 1/4 .0800
Second Quarter................................................................ 28 1/2 23 3/8 .1000
Third Quarter................................................................. 28 3/8 23 .1000
Fourth Quarter................................................................ 28 22 7/8 .1000
Fiscal 1997
First Quarter................................................................. 27 1/2 21 .0625
Second Quarter................................................................ 29 3/8 26 .0800
Third Quarter................................................................. 28 3/8 23 1/2 .0800
Fourth Quarter................................................................ 26 5/8 20 1/8 .0800
The amount of cash dividends on common stock which may be paid by the
Company is limited by the restrictions under its credit agreement. See Note 11
to the Company's Consolidated Financial Statements.
5
ITEM 6 -- SELECTED FINANCIAL DATA
First Brands Corporation and Subsidiaries
SELECTED FINANCIAL DATA
The following table includes selected financial data for the five years ended
June 30, 1998, that are derived from and more fully described in the
Consolidated Financial Statements and Notes.
Years Ended(1)
--------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
(Dollars in millions, except per share amounts) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Net sales ..................................................... $1,203.7 $1,119.9 $1,073.0 $1,036.5 $1,086.3
Operating expenses(2) ......................................... 1,067.0 981.3 928.8 901.2 935.5
Amortization and other depreciation ........................... 14.6 13.4 15.6 16.5 20.3
Restructuring expense(3) ...................................... 2.7 19.0 -- -- --
Interest expense and amortization of debt discount and expense. 29.6 20.4 17.5 18.8 22.4
Discount on sale of receivables(4) ............................ 4.6 4.0 4.0 4.0 4.3
Other income (expense), net(5) ................................ (0.5) 1.6 1.8 (21.2) (0.1)
Income before extraordinary loss and cumulative effect of
change in accounting principle(6) ......................... 52.3 50.8 65.1 43.2 60.1
Net income .................................................... $ 45.4 $ 50.2 $ 65.1 $ 38.7 $ 60.1
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share(7)
Income before extraordinary loss and cumulative change. $ 1.29 $ 1.22 $ 1.53 $ 1.01 $ 1.36
Net income ............................................ $ 1.12 $ 1.20 $ 1.53 $ 0.91 $ 1.36
Cash dividends per common share(7) ............................ $ 0.38 $ 0.30 $ 0.24 $ 0.19 $ 0.15
- --------------------------------------------------------------------------------------------------------------------------
Total assets .................................................. $1,060.2 $1,046.8 $ 860.9 $ 839.9 $ 814.0
Long-term debt (including current maturities) ................. $ 391.4 $ 383.3 $ 199.5 $ 167.2 $ 153.5
==========================================================================================================================
(1) Fiscal 1997 results include the operations for the NationalPak (Australia
and New Zealand) business since its acquisition in March, 1997. Results for
fiscal 1996 reflect three months of operations for the Forest Technology
business, which was acquired in March, 1996. Fiscal 1995 results include the
operations of the acquired JONNY CAT and Multifoil (South Africa) businesses for
twelve and two months, respectively. On August 26, 1994, the Company sold the
Prestone antifreeze/coolant and car care business ("the Prestone business"),
accordingly, results for fiscal 1995 include only eight weeks of operations for
the Prestone business.
(2) Operating expenses include that portion of depreciation expense associated
with the production of inventory.
(3) During fiscal 1997, the Company provided $19.0 million for a restructuring
plan that was primarily comprised of the closing of a distribution and office
facility and an early retirement program. During fiscal 1998, due to greater
than anticipated participation in the early retirement program and revision of
earlier estimates, the Company made an additional provision of $2.7 million to
the restructuring plan (See Note 3 to the Company's Consolidated Financial
Statements).
(4) Reflects costs associated with the sale of a fractional ownership interest
in the Company's accounts receivable (See Note 5 to the Company's Consolidated
Financial Statements).
(5) Other income (expense), net, for the year ended June 30, 1995 includes a
$20.4 million charge relating to the write-off of assets and the costs
associated with litigation proceedings and settlements pertaining to the
Company's formerly operated mobile recycling business. Also included is the gain
associated with the sale of the Prestone business and the loss on the disposal
of the Company's automotive service centers (See Note 4 to the Company's
Consolidated Financial Statements).
(6) Income before extraordinary loss and cumulative effect of change in
accounting principle excludes the charge associated with the immediate expensing
of previously capitalized costs related to certain business process
re-engineering activities, for the year ended June 30, 1998; and the premium and
the write-off of unamortized issuance costs related to the repurchase of
subordinated debt, for the years ended June 30, 1997 and 1995 (See Notes 2 and
11 to the Company's Consolidated Financial Statements).
(7) All per share figures have been retroactively restated to reflect the
two-for-one stock split that was effective February 5, 1996.
6
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations
for the fiscal years ended June 30, 1998 and 1997 and the financial condition at
June 30, 1998 should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of First Brands.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
The following table sets forth the components of income and expense for the two
years ended June 30, 1998, on a dollar and percentage basis.
June 30, 1998 June 30, 1997
--------------------- ---------------------
In Thousands Percent In Thousands Percent
- ------------------------------------------------------------------------------------------------------------------------
Net sales ............................................................ $1,203,670 100.0% $1,119,898 100.0%
Cost of goods sold ................................................... 775,870 64.5 713,203 63.7
- ------------------------------------------------------------------------------------------------------------------------
Gross profit ......................................................... 427,800 35.5 406,695 36.3
Selling, general and administrative expenses ......................... 291,156 24.2 268,086 23.9
Amortization and other depreciation .................................. 14,585 1.2 13,411 1.2
Restructuring expense ................................................ 2,700 0.2 19,000 1.7
Interest expense and amortization of debt discount and expenses ...... 29,604 2.5 20,383 1.8
Discount on sale of receivables ...................................... 4,561 0.4 3,992 0.4
Other income (expense), net .......................................... (500) (0.0) 1,575 0.1
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, extraordinary loss
and cumulative effect of change in accounting principle ...... 84,694 7.0 83,398 7.4
Provision for income taxes ........................................... 32,364 2.7 32,533 2.9
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative effect of change in
accounting principle ......................................... 52,330 4.3 50,865 4.5
Extraordinary loss relating to the repurchase of
subordinated debt, net of taxes............................... -- -- (633) (0.0)
Cumulative effect of change in accounting princile, net of taxes ..... (6,922) (0.6) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income ............................................................ $ 45,408 3.7% $ 50,232 4.5%
========================================================================================================================
Net sales for the fiscal year ended June 30, 1998 were $1,203,670,000, 7.5%
above the prior year's sales of $1,119,898,000. Excluding the effect of
acquisitions, divestitures and currency fluctuation, sales in fiscal 1998 were
$1,110,673,000 compared to $1,086,253,000 last year, an increase of 2.2%.
In the household products division, domestic sales increased 2%. Within the
domestic group sales of plastic products, the largest category, grew 1%,
primarily due to new products. Sales of fireplace products grew 21% to
$27,000,000 due to increased distribution and market growth. Excluding the
effect of the NationalPak acquisition, ("the Australian business") international
sales of household products declined 2%, due to weak sales in Asia and South
Africa and the effect of weak local currencies. Sales of automotive products in
the domestic market remained essentially even with the prior year, reflecting
the residual effects of inventory downsizing by a major customer and an
unseasonably warm winter season, offset by share gains in most categories.
Export sales of automotive products declined 13% due to weakening demand in
Asian markets. The international subsidiaries reported a 3% rise in automotive
sales, however, this gain was more than offset by the negative impact of fiscal
1998 exchange rates. Increased sales in the pet products group resulted from the
new EVERFRESH brand product line and market growth.
Cost of goods sold in fiscal 1998 was $775,870,000, a 9% increase compared
to fiscal 1997's $713,203,000. The increased costs reflect higher sales volumes,
primarily associated with a full year of the Company's Australian business and
domestic GLADWARE and cat litter businesses as well as sales mix. Gross profit
for the year was $427,800,000 (35.5% of sales), 105% of last year's $406,695,000
(36.3% of sales). The increase in gross profit dollars reflects the
aforementioned increase in sales volumes, while the decrease in the gross margin
percentage resulted from a less favorable product mix and lower margins
7
associated with the introduction costs of the new GLADWARE and EVERFRESH
products.
Selling, general, and administrative expense increased 9%, to $291,156,000
from last year's $268,086,000. Domestically, the Company increased its
advertising and promotion spending to support the introduction of a wide range
of new products. The higher advertising and promotion expense was partially
offset by savings associated with the Company's restructuring program.
Internationally, excluding increases associated with a full year of the
Australian business, spending in the current year was ahead of the prior year
to support product and market development initiatives.
Amortization and other depreciation expense of $14,585,000 was 109% of last
year's $13,411,000, with the higher expense due to the amortization of goodwill
resulting from the acquisition of the Australian business. Interest expense for
the year increased 45% to $29,604,000 from the prior year's $20,383,000,
primarily because of borrowing costs associated with the acquisition of the
Australian business and higher spending on capital assets resulting from the
acquisition of previously leased assets. Interest expense also includes the
amortization of various financing and legal costs that were incurred in the
issuance of Company debt. The discount on sale of receivables reflects the costs
associated with the sale of a fractional ownership interest, without recourse,
in a defined pool of the Company's eligible trade accounts receivable.
Restructuring expense in fiscal 1997, relates to the Company's $19,000,000
charge ($11,590,000 after taxes or $0.28 per diluted share) for initiatives
aimed at streamlining certain operating and administrative functions, reducing
costs and improving operating efficiencies. During fiscal 1998, an additional
charge of $2,700,000 ($1,668,000 after taxes or $0.04 per diluted share) was
recorded to reflect the greater-than-expected participation in the early
retirement program along with revisions to earlier estimates, principally costs
associated with employee. Substantially all restructuring liabilities have been
paid or settled during fiscal 1998.
Other expense, net for fiscal 1998 reflects the loss associated with the
sale and/or disposal of equipment, various net foreign exchange losses and other
miscellaneous costs, none of which are individually significant. These losses
were partially offset by the gain associated with the sale of a portion of the
Company's foreign exchange contracts. Other income, net in fiscal 1997,
primarily reflects the gain associated with the early repayment of a long-term
note receivable along with interest income from that note which was partially
offset by foreign exchange losses and other non-recurring expenses.
The Company's effective tax rate for fiscal 1998 was 38.2% compared to
39.0% in fiscal 1997, primarily reflecting higher research tax credits.
The fiscal 1998 cumulative effect of change in accounting principle
($6,922,000 or $0.17 per diluted share) reflects the cost associated with the
immediate expensing (in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force Issue No. 97-13) of previously capitalized costs
related to certain business process re-engineering activities. The fiscal 1997
extraordinary loss ($633,000 or $0.02 per diluted share) resulted from the costs
associated with the repurchase of the previously outstanding Senior Subordinated
Notes.
Inflation was not considered to be a significant factor in the Company's
operations during fiscal 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which expands annual financial statement
disclosures about operating segments and establishes disclosure requirements
concerning a company's products, customers and geographic areas. Selected
information about operating segments is also required for interim financial
reports issued to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the disclosure
requirements previously established by SFAS No. 87, 88 and 106. The new
disclosure requirements are intended to standardize the reporting of pensions
and other postretirment benefits. While SFAS No. 132 does not change the
measurement or recognition requirements of those plans, it does require some new
information from plan sponsors and allows for the elimination of other
information which is no longer considered useful. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997.
The Company plans to adopt each of the above pronouncements in its fiscal
year beginning July 1, 1998. While the adoption of SFAS No. 130, 131 and 132
will have no impact on First Brands results of operations, cash flows or
financial position, the Company is currently evaluating the appropriate format
of disclosure for each pronouncement.
8
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
The following table sets forth the components of income and expense for the two
years ended June 30, 1997, on a dollar and percentage basis.
June 30, 1997 June 30, 1996
--------------------- ---------------------
In Thousands Percent In Thousands Percent
- ------------------------------------------------------------------------------------------------------------------------
Net sales ............................................................ $1,119,898 100.0% $1,073,022 100.0%
Cost of goods sold ................................................... 713,203 64.5 687,103 64.0
- ------------------------------------------------------------------------------------------------------------------------
Gross profit ......................................................... 406,695 36.3 385,919 36.0
Selling, general and administrative expenses ......................... 268,086 23.9 241,711 22.5
Amortization and other depreciation .................................. 13,411 1.2 15,607 1.5
Restructuring expense ................................................ 19,000 1.7
Interest expense and amortization of debt discount and expenses ...... 20,383 1.8 17,546 1.6
Discount on sale of receivables ...................................... 3,992 0.4 3,963 0.4
Other income (expense), net .......................................... 1,575 0.1 1,827 0.2
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and extraordinary loss ...... 83,398 7.4 108,919 10.2
Provision for income taxes ........................................... 32,533 2.9 43,819 4.1
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss ..................................... 50,865 4.5 65,100 6.1
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes ............................................... (633) (0.0) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income ........................................................... $ 50,232 4.5% $ 65,100 6.1%
========================================================================================================================
Net Sales for the fiscal year ended June 30, 1997 were $1,119,898,000, 4%
above fiscal 1996's sales of $1,073,022,000. Excluding the effect of
acquisitions and divestitures, sales for fiscal 1997 were slightly ahead of
1996.
Sales in the household products business increased due to the first full
year of sales from the firelog and fire starter business, strong export sales
(primarily to Japan), higher international sales (resulting from the acquired
Australian business) and a slight increase in domestic unit volumes and sales.
Internationally, increased sales resulting from the aforementioned Australian
acquisition were partially offset by lower Canadian sales as well as unfavorable
exchange rates, primarily in South Africa. Sales of automotive products
(excluding sales from the Company's discontinued contract packaging and other
divested businesses) declined during fiscal 1997 due to a soft domestic retail
market and an inventory reduction program instituted by the Company's largest
customer. Pet product sales increased in both a dollar and quantity basis as a
result of continued market share growth and product introductions.
Cost of goods sold in fiscal 1997 was $713,203,000 compared to $687,103,000
in fiscal 1996. The 4% increase in costs primarily reflects higher volume sales
and increased polyethylene costs. Gross profit for fiscal 1997 was $406,695,000
(36% of sales), 105% of 1996's $385,919,000 (36% of sales). Gross profit dollars
increased during the year due to higher sales volumes, while the gross margin
percentage was maintained between years as manufacturing efficiencies and
product mix offset increased raw material costs.
Selling, general, and administrative expense of $268,086,000 was 11% above
fiscal 1996's $241,711,000. Increased spending in the domestic businesses
reflected marketing initiatives aimed at supporting new product introductions
and expanding distribution and line extensions. Internationally, excluding the
acquisition of the Australian business, spending during fiscal 1997 was down
slightly as marketing programs were cut back to offset lower sales. Overhead
increases also reflected the Company's Australia and New Zealand businesses, as
well as the first full year of operations of the fire starter and firelog
business.
Amortization and other depreciation expense of $13,478,000 in 1997 was 86%
of 1996's $15,607,000. The lower expense for 1997 reflects the impact of assets
that were fully amortized during fiscal 1996. Interest expense for fiscal 1997
was $20,383,000, 116% of 1996's $17,546,000, primarily due to borrowing costs
associated with the acquisition of the Australian business and higher average
borrowings during the year, which were partially offset by lower rates. Interest
expense also includes the amortization of various financing and legal costs that
were incurred in the issuance of
9
Company debt. The discount on sale of receivables reflects the costs associated
with the sale of a fractional ownership interest, without recourse, in a defined
pool of the Company's eligible trade accounts receivable.
Restructuring expense in 1997 relates to the Company's $19,000,000 charge
($11,590,000 after taxes, or $0.28 per share) for initiatives aimed at
streamlining certain operating and administrative functions, reducing costs and
improving operating efficiencies. The charge is composed primarily of employee
related costs, primarily an early retirement package, as well asset write-downs
and disposals, mainly of a distribution facility and adjacent office center.
Other income in 1997 primarily reflects the gain associated with the
repayment of a long-term note receivable along with interest income from the
note that was partially offset by foreign exchange losses and other one time
non-operating expenses. In 1996, other income primarily reflected accrued
interest that was reversed as a result of a tax audit settlement and interest
income received on a long-term note receivable.
The Company's effective tax rate for fiscal 1997 was 39.5% compared to
40.2% in fiscal 1996, reflecting higher favorable permanent tax differences and
a lower blended state tax rate.
The extraordinary loss of $633,000 or $0.02 per share resulted from the
costs associated with the repurchase of the Company's previously outstanding
$100,000,000 9 1/8% Senior Subordinated Notes.
Inflation was not considered to be a significant factor in the Company's
operations during fiscal 1997.
Financial Condition
At June 30, 1998 worldwide credit facilities in place aggregated $403,702,000 of
which $110,652,000 was available but unused. Excluding acquisitions or stock
repurchases, the Company expects to repay up to $40,000,000 on these credit
facilities over the next twelve months by utilizing positive cash flow generated
by its operations. The Company also has the option to sell up to $100,000,000 of
fractional ownership interest, without recourse, in a defined pool of eligible
accounts receivable. As of June 30, 1998, the entire $100,000,000 had been sold
(See Note 5). As of June 30, 1998, the Company had long-term debt outstanding of
$388,054,000. Principal payments due on long-term debt (including current
maturities) total $217,752,000 for the five-year period beginning July 1, 1998.
To balance its exposure to fluctuations in interest rates, foreign
currencies and polyethylene resin pricing, the Company periodically enters
into interest rate and foreign currency swaps and raw material contracts. At
June 30, 1998 the Company was party to various interest swap agreements with a
notional amount of approximately $127,000,000, which will mature over the next
5 years. The Company has entered into fixed price contracts (with various
maturities through 2006), which covers about 37% of the Company's domestic
resin requirements. There is also a "collar" contract which assures prices do
not exceed a cap, as well as setting a floor, covering an additional 20% of
the Company's domestic resin requirements. To reduce its foreign exchange risk,
the Company periodically enters into foreign currency contracts that can limit
the impact of exchange rate fluctuations resulting from anticipated inventory
purchases and intercompany transactions. (See Note 10).
Capital expenditures, including capitalized interest, were $44,480,000
during fiscal 1998 and $41,960,000 in fiscal 1997. The additions to property,
plant and equipment relate to the Company's emphasis on continued enhancements
in product quality, reductions in manufacturing costs, product development and
technology improvements. During fiscal 1998 and 1997, the Company also acquired
previously leased equipment totaling $44,208,000 and $22,320,000, respectively.
The Company's fiscal 1999 plan reflects capital expenditures and associated
capitalized interest of approximately $45,900,000 and fixed payments (interest,
principal, receivable financing costs and lease payments) of approximately
$44,000,000.
The Company's debt agreements have restrictions on the Company's ability to
incur certain indebtedness; however, based on its working capital requirements,
the current availability under its credit facilities, and its ability to
generate positive cash flows from operations, the Company does not believe that
such limitations will have a material effect on the Company's long-term
liquidity. The Company believes that it will have the funds necessary to meet
all of its above described financing requirements and all other fixed
obligations. Should the Company undertake strategic acquisitions, requiring
funds in excess of its internally generated cash flow, it might be required to
incur additional debt.
Certain of the Company's operations are subject to federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. The Company believes that it
is in substantial compliance with all applicable environmental laws and
regulations.
Year 2000 Issue
Over the past several years the Company has been dedicating significant
resources, from both a financial and personnel basis, towards an upgrade of its
U.S. and Canadian computer applications. These enhancements are intended to
improve many business areas, such as customer service, inventory control, data
interfacing between forecasting, production and sales and other logistic
efficiencies. In addition to the aforementioned improvements, the implementation
of these new systems is intended to address the Year 2000 issue. The
10
Year 2000 issue refers to the potential impact to various date-sensitive
software and hardware which utilize two digits rather than four when defining
the current year.
In addressing the Year 2000 issue the Company has reviewed the potential
impact to both its information systems and to any ancillary system which may be
impacted. This review included, but was not limited to, an analysis of all
significant systems or assets which may use microcontrollers. The Company is now
in the final testing phase of its sales, costing and production modules and
currently intends to implement these systems in the first and second quarters of
calendar 1999. In addition to upgrading its own systems, the Company has
contacted certain significant suppliers to determine their Year 2000 compliance
profile. To date, the Company has not received any information which would
indicate that the Year 2000 will result in any significant disruption from its
suppliers. If any supplier should develop a Year 2000 problem, the Company
believes that it is likely that there will be comparable items available from
other vendors. The Company does not currently believe that the inability to
adequately deal with the Year 2000 issue will impact any of its material third
party relationships.
All potential risks and uncertainties associated with the Year 2000 issue
can not be fully and accurately quantified. Based on an analysis of First Brands
systems implementation plan, the Company currently believes that any potential
loss in revenue associated with the Year 2000 issue will not have a material
impact to the ongoing operations of the Company. The Company's implementation
plan has involved an expenditure of approximately $29,000,000 from a total
budget of $33,000,000. It is unclear whether the Company can practicably develop
a contingency plan should the system implementation plan fail to adequately deal
with the Year 2000 issue. However, the Company currently believes that it will
have the resources available to adequately test and modify, if necessary, its
new information systems and other assets impacted by the Year 2000 issue between
the first quarter of calendar 1999 and January 1, 2000.
The Company's international subsidiaries, other than Canada which is
covered in the U.S. program, have established their own plans for dealing with
the Year 2000 issue, and have computer systems which are either fully compliant
as of June 30, 1998 or are expected to be compliant by December 31, 1998. Such
analysis was conducted in a manner similar to the methodology used by First
Brands in the U.S. and Canada.
Cautionary Statement for Purposes of the Private
Securities Litigation Reform Act of 1995
Certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 are contained within this report, reflecting
management's current estimate of future events. These forward-looking statements
are based on many assumptions, primarily related to the Company's expected
operating performance, and contain a number of risks and uncertainties including
changes in consumer demand, changes in prices of raw materials, changes in
distribution channels, competitive activities, fluctuations in foreign currency
exchange rates, consumer acceptance of new product lines, the Company's ability
to control internal costs, the successful development of new technologies, the
successful integration of acquisitions into existing operations, increases in
the cost of compliance with regulations, including environmental regulations,
certain risks associated with operating in foreign countries, the implementation
of strategic initiatives and general economic conditions. Accordingly, investors
are cautioned that such forward-looking statements should not be relied upon as
a prediction of actual results.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related documents of the Company are
included in Part IV, Item 14 of this Report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
11
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The principal executive officers and directors of the Company are as
follows:
NAME AGE POSITION HELD WITH THE CORPORATION
---- --- ----------------------------------
William V. Stephenson(4, 5)................. 57 Chairman, Chief Executive Officer and Director
Thomas H. Rowland(4)........................ 53 President, Chief Operating Officer and Director
Donald A. DeSantis.......................... 48 Senior Vice President, Chief Financial Officer
James S. Gracie............................. 39 Vice President, President of First Brands
International, Inc.
Mark E. Haglund............................. 47 Vice President, President of STP Products Inc.
Patrick J. O'Brien.......................... 42 Vice President, President of Household Products
Division
Ronald F. Dainton........................... 59 Vice President, Human Resources
Joseph B. Furey............................. 52 Vice President, Controller and Secretary
Einar M. Rod................................ 46 Vice President and General Counsel
Richard J. Mosback.......................... 45 Treasurer
A. R. (Bud) McClellan....................... 44 Assistant Controller and Assistant Secretary
Alfred E. Dudley(4*, 5)..................... 70 Director
Robert F. Bernstock(a)(2, 3)................ 47 Director
John C. Ferries(2, 3)....................... 60 Director
James R. Maher(2, 3)........................ 48 Director
James R. McManus(1, 5)...................... 64 Director
Denis Newman(3*, 4)......................... 68 Director
Ervin R. Shames(1*, 5)...................... 58 Director
Robert G. Tobin(1, 2*)...................... 60 Director
- ------------
(a) Mr. Bernstock was elected to the Board of Directors during 1997, increasing
the board membership to ten. Mr. Bernstock will stand for reelection at the
Annual Meeting of Stockholders on October 23, 1998.
* Denotes Chairman of Committee
(1) Member, Compensation Committee
(2) Member, Pension Committee
(3) Member, Audit Committee
(4) Member, Executive Committee
(5) Member, Nominating Committee
------------------------
The Certificate of Incorporation provides for the classification of the
Board of Directors into three classes of membership with terms expiring on
different Annual Meeting dates. Approximately one-third of the members of the
Board of Directors are nominated each year to serve as directors for a term of
three years. Directors are elected at the Annual Meeting of Stockholders for the
terms specified and continue in office until their respective successors have
been elected and have qualified. The terms of office of Messrs. Bernstock,
Newman and Shames expire at the Annual Meeting of Stockholders on October 23,
1998, the terms office of Messrs Dudley, McManus and Rowland expire at the
Annual Meeting of Stockholders in October 1999, and the terms of office of
Messrs, Ferries, Maher, Stephenson and Tobin expire at the Annual Meeting of
Stockholders in October 2000. Executive officers and key employees are elected
annually by, and serve at the pleasure of, the Board of Directors. There are no
family relationships between any directors, executive officers or key employees
of First Brands.
12
Mr. Stephenson was elected Chairman of the Board on January 1, 1997. On
September 1, 1994, he was appointed Chief Executive Officer of the Company. He
served as President from August 11, 1992 until he relinquished that title on
August 7, 1998. From August, 1992 to September, 1994 he served as Chief
Operating Officer. He was elected a Director of the Company on August 11, 1992.
Mr. Rowland was elected President and Chief Operating Officer on August 7,
1998. He was elected Executive Vice President of the Company and served as
President of the Home Products Division from August 11, 1992 to August 7, 1998.
On November 1, 1996 he was elected a Director of the Company.
Mr. DeSantis was elected Senior Vice President of the Company on November
5, 1993 and has been the Chief Financial Officer of the Company since June 19,
1986. He was re-elected as Treasurer on August 9, 1994 and held that position
until he relinquished the title on October 24, 1997.
Mr. Gracie was elected Vice President of the Company on August 6, 1997 and
simultaneously appointed President of First Brands International, Inc. He is
also Chief Executive Officer of First Brands (Canada) Corporation. He was Senior
Vice President, First Brands International from May, 1996 until August, 1997.
Prior to that he was CEO and President of First Brands (Canada) Corporation from
November, 1994 to May, 1996. From March 1993 to October 1994, he was Vice
President, Home Products in Canada.
Mr. Haglund was elected Vice President of the Company on October 27, 1995.
He was appointed President of STP Products, Incorporated on September 1, 1995,
after serving as Senior Vice President and General Manager since August 1, 1994
and Vice President of Marketing since March, 1992.
Mr. O'Brien was appointed President of the Household Products Division on
August 7, 1998. He was elected Vice President of the Company on October 27,
1995. He was appointed President of A&M Products, Incorporated on September 1,
1995, after serving as Vice President and General Manager since May, 1992.
Mr. Dainton was elected Vice President, Human Resources of the Company on
May 24, 1989.
Mr. Furey was elected Corporate Secretary on January 20, 1995 and Vice
President of the Company on November 5, 1993. He has also served as Controller
of the Company since June 19, 1986. From 1986 until 1995, Mr. Furey served as
Assistant Secretary.
Mr. Rod was elected Vice President of the Company effective June 1, 1997.
He became General Counsel to the Company on May 20, 1996. Previously, he was an
attorney with PepsiCo, Inc. a manufacturer and distributor of consumer products
and provided legal counsel to PepsiCo's divisions, Pepsi-Cola North America and
Pepsi-Cola International since prior to 1992.
Mr. Mosback was elected Treasurer on October 24, 1997 after serving as
Assistant Treasurer since January 20, 1995. He became Director of Finance and
Internal Audits in 1993 and served in that capacity until January, 1995.
Mr. McClellan was elected Assistant Secretary on January 26, 1996 and was
elected Assistant Controller on January 20, 1995. He served as Director of
Accounting from 1992 to 1995.
Mr. Bernstock has been President and Chief Executive Officer of Vlasic
Foods International (a food manufacturer and marketer) since March, 1998. Since
July 1997, he served as Executive Vice President of the Campbell Soup Company, a
food manufacturer and marketer, and President of its Specialty Food Division
which was spun off in March 1998. He was appointed President -- U.S. Grocery
Division and Senior Vice President of Campbell Soup Company in March, 1996. Mr.
Bernstock served as President -- International Grocery Division from August 1994
to February 1996. He served as President -- International Soup Division from
June, 1993 to July, 1994. He was elected a Director of the Company on October
16, 1997.
Mr. Dudley was elected Chairman and Chief Executive Officer on June 19,
1986. He relinquished the title of Chief Executive Officer effective September
1, 1994 and the title of Chairman on January 1, 1997. He has been a Director of
the Company since June 19, 1986.
Mr. Ferries has been a consultant for the MacManus Group (a communications
group consisting of nine companies) running their Mergers and Acquisitions
program since January, 1998. In December,
13
1997, he retired from DMB&B, a MacManus advertising company, where he served as
President -- Americas since September, 1993. He was elected a Director of the
Company on June 5, 1997.
Mr. Maher has been President of Mafco Holdings Inc., a diversified holding
company, since July, 1998. Mr. Maher had been President and Chief Executive
Officer of Mafco Consolidated Group, Inc., diversified manufacturer, now a
wholly owned subsidiary of Mafco Holdings since July, 1995. He was Chairman of
the Board from April, 1995 to April 1996 and was President and Chief Executive
Officer from December, 1992 to April, 1995 of Laboratory Corporation of America,
a health services company. He was elected a Director of the Company on May 26,
1988.
Mr. McManus has been Chairman, Chief Executive Officer of Marketing
Corporation of America, a marketing services firm, since prior to 1986. He also
serves on the Board of Au Bon Pain, Inc. On February 1, 1994, Mr. McManus
resigned as President and Chief Executive Officer of Business Express, Inc. a
regional airline operating in the Northeastern United States. On January 22,
1996, a petition for Chapter IX Bankruptcy Protection was filed against Business
Express in Federal Court in Manchester, New Hampshire by Saab Aircraft of
America and two of its operating subsidiaries. He was elected a Director of the
Company on November 18, 1986.
Mr. Newman has been a Managing Director of MidMark Associates, Inc., a
private investment firm since December, 1989. He also serves as a director of
Clearview Cinema Group, Inc.. He was elected a Director of the Company on May
30, 1986.
Mr. Shames has been Chairman of Select Comfort Corporation, a mattress
manufacturer and retailer, since April, 1996 and was appointed Visiting Lecturer
at the University of Virginia's Darden Graduate School of Business in September,
1996. He was a private investor and consultant from January, 1995 to April, 1996
and was President and Chief Executive Officer of Borden, Inc., a consumer
products manufacturer, from December, 1993 to January, 1995. He was President
and Chief Operating Officer of Borden, Inc. from July, 1993 until December,
1993. He was elected a Director of the Company on May 28, 1987.
Mr. Tobin retired as Chairman of The Stop & Shop Supermarket Companies,
Inc. and The Stop & Shop Supermarket Company, retail food, on July 31, 1998 when
he became President and Chief Executive Officer of Ahold, Inc. Mr. Tobin served
as Chairman, President and Chief Executive Officer of the aforementioned
companies from January 1995 through December, 1997, relinquishing the title of
President and Chief Executive Officer in December 1997. He was President and
Chief Executive Officer of The Stop & Shop Supermarket Company from May, 1994 to
January, 1995, and prior to this was President and Chief Operating Officer of
The Stop & Shop Supermarket Companies, Inc. and The Stop & Shop Supermarket,
since 1993. He was elected a Director of the Company on September 6, 1991.
ITEM 11 -- EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled 'Executive Compensation'
in the Company's Proxy Statement, dated September 22, 1998, for its 1998 Annual
Meeting of Stockholders.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section entitled 'Beneficial Ownership of
Voting Securities' in the Company's Proxy Statement, dated September 22, 1998,
for its 1998 Annual Meeting of Stockholders.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
PAGE
----
Report of Management....................................................................16
Independent Auditors' Report............................................................16
Consolidated Statements of Income -- For the Years Ended June 30, 1998, 1997 and
1996.................................................................................17
Consolidated Balance Sheets -- June 30, 1998 and 1997...................................18
Consolidated Statements of Stockholders' Equity -- For the Years Ended June 30, 1998,
1997 and 1996........................................................................20
Consolidated Statements of Cash Flows -- For the Years Ended June 30, 1998, 1997 and
1996.................................................................................21
Notes to Consolidated Financial Statements..............................................22
(a) (2) Financial Statement Schedules
Independent Auditors' Report On Schedules...............................................33
The following financial statement schedule of the Company as set forth
below is filed with this Report on Form 10-K:
Valuation and Qualifying Accounts (Schedule VIII) For the Years Ended June 30, 1998,
1997 and 1996........................................................................34
All other schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related Notes.
(a) (3) Exhibits -- See Exhibit Index on Pages 36-37 for exhibits filed with the
Annual Report on Form 10-K, as submitted with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
None.
15
First Brands Corporation and Subsidiaries
Report of Management
Management of First Brands Corporation is responsible for the financial and
operating information contained in the Annual Report including the financial
statements covered by the independent auditors' report. These statements were
prepared in conformity with United States generally accepted accounting
principles and include, where necessary, informed estimates and judgments.
The Company maintains systems of accounting and internal control designed
to provide reasonable assurance that assets are safeguarded against loss, and
that transactions are executed and recorded properly so as to ensure that the
financial records are reliable for preparing financial statements.
Elements of these control systems are the establishment and communication
of accounting and administrative policies and procedures, the selection and
training of qualified personnel and continuous programs of internal audits.
The Company's financial statements are reviewed by its Audit Committee,
which is composed entirely of non-employee Directors. This Committee meets
periodically with the independent auditors, management, and the corporate
internal auditor to review the scope and results of the annual audit, interim
reviews, internal controls, internal auditing, and financial reporting matters.
The independent auditors and the corporate internal auditor have direct access
to the Audit Committee.
/s/ W. V. Stephenson /s/ D. A. DeSantis
W. V. Stephenson D. A. DeSantis
Chairman and Chief Senior Vice President and
Executive Officer Chief Financial Officer
August 6, 1998
Independent Auditors' Report
The Board of Directors and Stockholders
of First Brands Corporation:
We have audited the accompanying consolidated balance sheets of First Brands
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Brands
Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for business process re-engineering
costs effective October 1, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
August 6, 1998
16
First Brands Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended
--------------------------------------------------
June 30, June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $1,203,670 $1,119,898 $1,073,022
Cost of goods sold 775,870 713,203 687,103
Selling, general and administrative expenses 291,156 268,086 241,711
Amortization and other depreciation 14,585 13,411 15,607
Restructuring expense (Note 3) 2,700 19,000 --
Interest expense and amortization of debt discount and expenses 29,604 20,383 17,546
Discount on sale of receivables (Note 5) 4,561 3,992 3,963
Other income (expense), net (500) 1,575 1,827
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, extraordinary loss and
cumulative effect of change in accounting principle 84,694 83,398 108,919
Provision for income taxes (Note 14) 32,364 32,533 43,819
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative effect of change in
accounting principle 52,330 50,865 65,100
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes (Note 11) -- (633) --
Cumulative effect of change in accounting principle, net of taxes (Note 2) (6,922) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 45,408 $ 50,232 $ 65,100
====================================================================================================================================
Per common share (Note 1):
Basic:
Income before extraordinary loss and cumulative effect of change
in accounting principle $ 1.32 $ 1.25 $ 1.56
Extraordinary loss -- (0.02) --
Cumulative effect of change in accounting principle (0.17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.15 $ 1.23 $ 1.56
====================================================================================================================================
Diluted:
Income before extraordinary loss and cumulative effect of change
in accounting principle $ 1.29 $ 1.22 $ 1.53
Extraordinary loss -- (0.02) --
Cumulative effect of change in accounting principle (0.17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.12 $ 1.20 $ 1.53
====================================================================================================================================
Weighted average outstanding common shares (Note 1):
Basic 39,615,855 40,771,610 41,661,624
Diluted 40,501,876 41,756,802 42,600,021
====================================================================================================================================
See accompanying notes to the consolidated financial statements
17
First Brands Corporation and Subsidiaries
Consolidated Balance Sheets
Years Ended
---------------------------
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,029 $ 7,465
Accounts and notes receivable
(net of allowances for doubtful accounts and
discounts of $8,297 and $6,842) (Note 5) 118,326 134,554
Inventories (Note 1) 155,480 151,976
Deferred tax assets (Note 14) 11,827 15,992
Prepaid expenses 10,170 9,434
- ----------------------------------------------------------------------------------------
Total current assets 307,832 319,421
Property, plant and equipment
(net of accumulated depreciation of $160,529 and
$141,691) (Notes 1 and 6) 419,755 377,128
Patents, trademarks, proprietary technology and
other intangibles (net of accumulated amortization
of $204,916 and $192,631) (Notes 1 and 7) 284,849 310,095
Deferred charges and other assets
(net of accumulated amortization of $52,687 and $52,029) 47,765 40,137
- ----------------------------------------------------------------------------------------
Total assets $1,060,201 $1,046,781
========================================================================================
See accompanying notes to the consolidated financial statements.
18
First Brands Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
Years Ended
---------------------------------
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 4,562 $ 8,432
Current maturities of long-term debt (Note 11) 3,384 2,811
Accrued income and other taxes (Note 14) 8,253 7,373
Accounts payable 71,692 61,877
Accrued liabilities (Note 9) 92,919 106,084
- -------------------------------------------------------------------------------------------------
Total current liabilities 180,810 186,577
Long-term debt (Note 11) 388,054 380,467
Deferred tax liability (Note 14) 78,788 65,348
Other long-term obligations (Note 15) 26,401 20,473
Preferred stock, $1 par value, 10,000,000
shares authorized; none issued -- --
Common stock, $0.01 par value, 120,000,000 shares
authorized; 43,553,846 shares issued at June 30, 1998
and 43,394,044 shares issued at June 30, 1997 435 434
Capital in excess of par value 134,166 130,994
Cumulative foreign currency translation adjustment (27,556) (12,455)
Common stock in treasury, at cost; 4,407,000 shares at
June 30, 1998 and 3,355,000 shares at June 30, 1997 (123,039) (96,837)
Retained earnings 402,142 371,780
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 386,148 393,916
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,060,201 $1,046,781
=================================================================================================
See accompanying notes to the consolidated financial statements.
19
First Brands Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------------
Cumulative
Common Stock Capital Foreign
---------------------- In Excess Currency
Shares Par of Par Translation Retained Treasury
(Dollars in thousands) Outstanding Value Value Adjustment Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1995 20,935,314 $221 $120,914 $(7,173) $278,649 $(40,433) $352,178
Cash dividends (Note 1) -- -- -- -- (9,903) -- (9,903)
Exercise of stock options 199,196 2 4,470 -- -- -- 4,472
Tax benefit related to the exercise
of employee stock options -- -- 1,256 -- -- -- 1,256
Net income -- -- -- -- 65,100 -- 65,100
Purchase of treasury stock (279,300) -- -- -- -- (12,130) (12,130)
Foreign currency translation
adjustment -- -- -- (2,148) -- -- (2,148)
Two-for-one stock split 20,795,376 208 (208) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1996 41,650,586 $431 $126,432 $(9,321) $333,846 $(52,563) $398,825
Cash dividends (Note 1) -- -- -- -- (12,298) -- (12,298)
Exercise of stock options 253,458 3 3,350 -- -- -- 3,353
Tax benefit related to the exercise
of employee stock options -- -- 1,212 -- -- -- 1,212
Net income -- -- -- -- 50,232 -- 50,232
Purchase of treasury stock (1,865,000) -- -- -- -- (44,274) (44,274)
Foreign currency translation
adjustment -- -- (3,134) -- -- (3,134)
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1997 40,039,044 $434 $130,994 $(12,455) $371,780 $(96,837) $393,916
Cash dividends (Note 1) -- -- -- -- (15,046) -- (15,046)
Exercise of stock options 159,802 1 2,101 -- -- -- 2,102
Tax benefit related to the exercise
of employee stock options -- -- 1,071 -- -- -- 1,071
Net income -- -- -- -- 45,408 -- 45,408
Purchase of treasury stock (1,052,000) -- -- -- -- (26,202) (26,202)
Foreign currency translation
adjustment -- -- -- (15,101) -- -- (15,101)
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1998 39,146,846 $435 $134,166 $(27,556) $402,142 $(123,039) $386,148
====================================================================================================================================
See accompanying notes to the consolidated financial statements.
20
First Brands Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended
-----------------------------------------
June 30, June 30, June 30,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $45,408 $50,232 $65,100
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 44,427 41,448 38,282
Restructuring expense 2,700 19,000 --
Deferred income taxes 19,722 5,808 25,808
Amortization of gain on sale/leaseback -- (909) (1,580)
Cumulative effect of change in accounting principle 6,922 -- --
Loss on repurchase of subordinated notes -- 633 --
Change in non-cash current assets and liabilities, net of effect of
businesses acquired:
(Increase) in accounts receivable (5,712) (25,674) (12,052)
(Increase) decrease in inventories (8,239) 4,405 11,836
(Increase) in prepaid expenses (1,072) (3,942) (1,048)
Increase (decrease) in accrued income and other taxes 5,712 4,306 (7,263)
Increase (decrease) in accounts payable 12,207 (9,808) (10,937)
(Decrease) in accrued liabilities (14,184) (14,700) (36,171)
Other changes (4,053) (1,440) (3,687)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 58,430 19,127 3,188
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 103,838 69,359 68,288
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (44,480) (41,960) (42,293)
Acquisition of leased assets (44,208) (22,320) (9,797)
Acquisition of businesses, net of cash acquired -- (160,210) (32,255)
Retirements of plant and equipment 8,218 1,109 1,072
Purchase and installation of software (13,514) (10,564) (5,518)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (93,984) (233,945) (88,791)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving credit facilities, net 18,899 135,143 35,000
(Decrease) increase in other borrowings, net (728) 4,149 (3,835)
Increase in securitization of accounts receivable, net 15,000 15,000 10,000
Issuance of 7 1/4% senior subordinated notes, net of underwriting discount -- 149,025 --
Repurchase of 9 1/8% senior subordinated notes -- (100,000) --
Proceeds from settlement of Prestone note receivable -- 13,000 --
Proceeds from exercise of stock options 2,102 3,353 4,472
Purchase of common stock for treasury (26,202) (44,274) (12,130)
Dividends paid (14,361) (11,671) (9,903)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,290) 163,725 23,604
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,564 (861) 3,101
Cash and cash equivalents at beginning of year 7,465 8,326 5,225
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12,029 $ 7,465 $ 8,326
==================================================================================================================================
See accompanying notes to the consolidated financial statements.
21
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant
Accounting Policies
First Brands Corporation and subsidiaries ("First Brands" or the "Company")
engages in the development, manufacture, marketing and sale of consumer products
sold under branded and private labels. Principal branded products include: GLAD
and GLAD-LOCK (plastic wrap and bags); GLADWARE (plastic containers); STP (oil
and fuel additives and other specialty automotive appearance products); SCOOP
AWAY, EVER CLEAN, EVERFRESH and JOHNNY CAT (cat litters); and STARTERLOGG and
HEARTHLOGG (wood fire starters and fire logs).
Basis of Presentation
The accompanying financial statements reflect the consolidated accounts of the
Company for all periods presented. All material intercompany transactions and
balances have been eliminated. To prepare financial statements in conformity
with generally accepted accounting principles, management must make a number of
assumptions and estimates which affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statement, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. All
information presented is for a fiscal year, unless otherwise noted.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method for substantially all inventories in the
United States. In general, the average cost or FIFO method is used by the
international operations.
Inventories were composed of the following as of June 30, 1998 and 1997:
(In thousands) 1998 1997
- -------------------------------------------------
Raw materials $ 34,160 $ 34,518
Work in process 5,485 5,795
Finished goods 115,835 111,663
- -------------------------------------------------
$155,480 $151,976
=================================================
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Expenditures for replacements
are capitalized and the replaced assets are retired. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the respective
assets for accounting purposes. The Company capitalizes interest on major fixed
asset additions during construction. Interest capitalized totaled $2,297,000,
$1,864,000 and $2,017,000 in 1998, 1997 and 1996, respectively.
Patents, Trademarks, Proprietary Technology and Other Intangibles
Patents, trademarks, proprietary technology and other intangibles are carried at
cost less accumulated amortization which is calculated on a straight-line basis
over the estimated useful lives of the assets, not to exceed 40 years.
Deferred Charges and Other Assets
Deferred charges and other assets include financing costs that are amortized
over the terms of the respective financing agreements, as well as long-term
notes receivable, purchased software, investments and assets relating to the
securitization of accounts receivable.
Research and Development
Research and development expenditures are charged to expense as incurred.
Expenditures were $4,778,000, $5,043,000 and $4,789,000 in 1998, 1997 and 1996,
respectively.
Income and Dividends per Share
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 replaces primary
and fully diluted earnings per share ("EPS") with basic and diluted EPS, and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all companies with complex capital structures. Basic EPS
represents the earnings available for each common share outstanding during the
period. Diluted EPS reflects earnings available for each common share after the
affect of all potentially dilutive common shares, such as options, warrants and
convertible securities. The number of weighted average shares used to calculate
diluted EPS differs slightly from those shares used to calculate basic EPS due
to the effect of employee stock options.
Cash dividends declared for fiscal 1998, 1997 and 1996 were $0.38, $0.30 and
$0.24 per share, respectively.
Statement of Cash Flows
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
22
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Supplemental disclosure of cash flow information:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------
Cash paid during the year for:
Interest $32,705 $18,821 $23,674
Income Taxes $16,378 $27,385 $34,380
====================================================================
Interest payments during fiscal 1996 include $6,325,000 paid in settlement of
an IRS audit.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer.
Risk Management
The Company periodically enters into various hedging transactions to minimize
the effect of fluctuations in currency exchange rates, raw material pricing and
interest rates. The foreign currency forward contracts limit the Company's
exposure to currency fluctuations associated with certain transactions, while
raw material contracts stabilize a portion of the costs associated with the
Company's resin purchases. Interest rate swaps allow the Company to better
balance its interest rate exposure between fixed and floating interest rates.
The Company does not hold or issue these financial instruments for trading
purposes.
Foreign Currency Translation
The assets and liabilities of the international subsidiaries are translated to
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated at the average monthly exchange rate.
Resulting adjustments are recorded in a separate component of stockholders'
equity as "Cumulative foreign currency translation adjustment."
Reclassification
Certain amounts for fiscal 1997 and 1996 have been reclassified to conform to
the fiscal year 1998 classifications.
2. Accounting Change
During the second quarter of fiscal 1998, the Company changed its accounting
policy for costs associated with the business process re-engineering activities
which relate to the Company's information system upgrade. In accordance with the
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force Issue
No. 97-13, the Company is now expensing these process re-engineering costs.
Prior to fiscal 1998, the Company capitalized these costs, intending to amortize
them over a five to seven year period commencing with the implementation of the
new information system. The cumulative effect of the accounting change principle
resulted in a charge to earnings of $11,434,000 ($6,922,000 after taxes or $0.17
per diluted share). On a pro forma basis, the Company's reported net income for
fiscal 1997 and 1996 would have been reduced by $5,069,000 ($0.12 per diluted
share) and $1,022,000 ($0.02 per diluted share), respectively.
3. Restructuring
In fiscal 1997, the Company recorded a $19,000,000 restructuring charge
($11,590,000 after taxes or $0.28 per diluted share), for initiatives aimed at
streamlining certain operating and administrative functions, reducing costs and
improving operating efficiencies. During fiscal 1998, an additional charge of
$2,700,000 ($1,668,000 after taxes or $0.04 per diluted share), was recorded to
reflect greater than anticipated participation in the early retirement program
along with revisions to earlier estimates, principally costs associated with
employees. The total charge of $21,700,000 was composed of a $10,000,000 charge
for employee related costs, primarily an early retirement window package and
related costs to obtain personnel reductions and $11,700,000 related to asset
write-downs and disposals, mainly of a distribution facility and adjacent office
center in East Hartford, Connecticut. Substantially all restructuring
liabilities have been paid or settled during fiscal 1998.
4. Acquisitions and Divestitures
Acquisitions
During fiscal 1998, the Company's New Zealand subsidiary acquired, for
approximately $750,000, the XLO sponge brand in the New Zealand market. In
fiscal 1997, the Company's South African subsidiary acquired 76% of the
outstanding stock of Sealapac (PVT) LTD., a Zimbabwe manufacturer and marketer
for the consumer products and commercial markets.
On March 14, 1997, the Company purchased, for approximately $160,000,000,
the NationalPak business in Australia and New Zealand from National Foods
Limited. NationalPak manufacturers and markets consumer products such as plastic
wrap and bags, aluminum foil and wiping cloths under the GLAD, CHUX, OSO, MONO
and ROTA brand names. The acquisition was funded by long-term borrowings in the
United States, Canada, Australia and New Zealand (see Note 11). During fiscal
1998, the Company sold to local management a 4.4% interest in the Australian
subsidiary.
On March 19, 1996, the Company purchased, for approximately $32,000,000,
the net assets of Forest Technology Incorporated, the manufacturer and marketer
of the STARTERLOGG and HEARTHLOGG brand of wood fire starters and fire logs.
All of the above business and brand acquisitions have been accounted for by
the purchase method, and accord-
23
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
ingly, the results of operations of NationalPak, Forest Technology, Sealapac and
XLO are included in the Company's Consolidated Statements of Income from the
respective dates of acquisition. The excess of costs over net assets acquired
for the NationalPak and Forest Technology acquisitions were $63,100,000 and
$30,100,000, respectively, and are being amortized over a forty year period on a
straight line basis.
Divestitures
During fiscal 1997, the Company sold its SIMONIZ wax and polish business. The
gain associated with the sale of the SIMONIZ business is reflected in Other
income (expense), net in the fiscal 1997 Consolidated Statement of Income.
Early in fiscal 1995, First Brands sold the Prestone antifreeze/coolant and
car care business to Prestone Products Corporation ("Prestone"). During fiscal
1997, Prestone repaid a $13,000,000 loan (which for financial reporting purposes
was valued at $9,000,000 at the time of the divestiture), resulting in a gain of
approximately $2,700,000 that is reflected in Other income (expense), net, in
the Consolidated Statement of Income.
5. Accounts Receivable
During fiscal 1998, the Company exercised its option to terminate a previous
agreement to sell up to $100,000,000 in eligible trade accounts receivable.
After terminating its previous agreement, the Company entered into a new three
year agreement, with an automatic yearly renewal provision thereafter, for the
sale of $100,000,000 in fractional ownership interest in a defined pool of
eligible receivables. The new program increases the receivable pool which may be
considered eligible, reduces the yearly service fees and provides for a lower
discount rate. As of June 30, 1998 the entire $100,000,000 had been sold,
reflecting a $15,000,000 increase over the prior year-end balance. The amounts
sold are presented as reductions in accounts receivable on the accompanying
Consolidated Balance Sheets. The costs associated with this program are reported
as "Discount on sale of receivables."
6. Property, Plant and Equipment
Property, plant and equipment as of June 30, 1998 and 1997 consisted of:
Useful
(In thousands) 1998 1997 Lives
- -------------------------------------------------------------------------
Land and
Improvements $ 14,052 $ 18,713 --
Buildings 70,552 77,847 30-40 years
Machinery and
Equipment 479,060 404,019 13-15 years
Other 16,620 18,240 3-5 years
- -------------------------------------------------------------------------
580,284 518,819
Less: Accumulated
depreciation (160,529) (141,691)
- -------------------------------------------------------------------------
$ 419,755 $ 377,128
=========================================================================
Depreciation expense was $31,009,000, $29,042,000 and $25,149,000 in fiscal
1998, 1997 and 1996, respectively.
7. Patents, Trademarks, Proprietary Technology and Other Intangibles
The Company periodically reviews the carrying value of intangible assets to
determine whether the carrying amount of an asset is recoverable. The primary
indicators of recoverability are current or forecasted profitability of the
related acquired business, measured as profit before interest and amortization
of the related intangible assets compared to their carrying values. For the
three-year periods ended June 30, 1998, 1997 and 1996 there were no material
adjustments to the carrying values of intangible assets resulting from these
evaluations.
Patents, trademarks, proprietary technology and other intangibles as of June 30,
1998 and 1997 consisted of:
Useful
(In thousands) 1998 1997 Lives
- -------------------------------------------------------------------------
Trademarks $ 117,201 $ 116,866 40 years
Patents, proprietary
technology and
other intangibles 163,371 162,658 10-17 years
Excess of cost over
net assets
acquired 209,193 223,202 40 years
- -------------------------------------------------------------------------
489,765 502,726
Less: Accumulated
amortization (204,916) (192,631)
- -------------------------------------------------------------------------
$ 284,849 $ 310,095
=========================================================================
24
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Notes Payable
The Notes payable consisted of international subsidiaries' working capital
borrowings with local banks totaling $4,562,000 and $8,432,000 at June 30, 1998
and 1997, respectively. The international credit facilities, which aggregate
$17,456,000, are generally secured by the assets of the respective international
subsidiary, with approximately $2,024,000 at one international subsidiary
guaranteed by First Brands Corporation (U.S.). The Company also borrows against
an unsecured domestic line of credit and at June 30, 1998 and 1997, the entire
$15,000,000 available under this facility was unused. The average borrowings
outstanding and average interest rates charged during fiscal 1998 and 1997 were
$14,600,000 at 11.3% and $10,750,000 at 10.2%, respectively.
9. Accrued Liabilities
Accrued liabilities as of June 30, 1998 and 1997 consisted of the following:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Interest $ 5,764 $ 6,494
Employee benefits and wages 9,410 9,295
Marketing and sales programs 44,997 54,384
Raw material purchases 16,220 14,314
Other 16,528 21,597
- --------------------------------------------------------------------------------
$92,919 $106,084
================================================================================
10. Financial Instruments
The Company has entered into various interest rate swap agreements to transform
a portion of its variable rate debt into fixed rate obligations. According to
the provisions of these agreements, the Company will pay between 5.45% and 7.07%
fixed interest for up to five years and will receive floating rate counter
payments (5.64% at June 30, 1998). A majority of the swap agreements provide for
a five year renewal at the counterparties discretion. The difference between
interest paid and received is included as an adjustment to interest expense. The
notional amount of the contracts is approximately $127,000,000. The fair value
of each swap agreement may generate a gain or loss depending on the estimated
amounts that the Company would pay to terminate the agreement based on the
prevailing and anticipated interest rates at the reporting dates.
To limit the impact of exchange rate fluctuations resulting from
anticipated inventory purchases and intercompany transactions, the Company
periodically enters into foreign currency contracts. Outstanding contracts
totaled approximately $24,775,000 and $40,875,000 as of June 30, 1998 and 1997,
respectively. Contracts outstanding as of June 30, 1998 will mature over the
next ten years.
The Company has entered into various contracts to partially stabilize the
cost, at or below the market average over the last four years, of its
polyethylene resin requirements. Fixed price contracts cover about 37% of the
Company's domestic resin requirements and have various maturities through 2006.
There is also a "collar" contract protecting a range of prices covering an
additional 20% of the Company's domestic resin requirements.
The Company considers the risks associated with its interest, currency and
resin contracts to be relatively low because of the Company's policy to only
enter into agreements with strong credit worthy counterparties. Gains and losses
on the currency impact of cross border transactions and the effect of foreign
currency contracts are recorded in Other income (expense), net in the
Consolidated Statement of Income. During fiscal 1998 a net credit of $1,900,000
was recorded from these transactions and during fiscal 1997 the net loss was
immaterial. Gains and losses on resin and interest contracts are recognized into
earnings when the related transactions being hedged are completed. There were no
significant gains or losses associated with these contracts in fiscal 1998 and
1997.
Other financial instruments include cash and cash equivalents, accounts and
notes receivable, notes payable, accounts payable and long-term debt. Because of
the short-term nature of cash and cash equivalents, accounts and notes
receivable, notes payable and accounts payable, their carrying value
approximates fair value. A portion of the Company's long-term debt consists of
variable rate instruments, therefore the carrying value approximates fair value.
The fair value of the Company's long-term fixed rate debt approximates the
carrying value as of June 30, 1998 and 1997.
25
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Long-term Debt
First Brands had the following long-term debt as of June 30, 1998 and 1997:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Senior Debt(a):
$300,000,000 Revolving Credit
Facility, 5 year term expiring
February 2002, interest at prime
rate, LIBOR plus .275% or CD rate
plus .4%; facility fee of .15% $190,000 $162,000
$59,354,000 Australian and New Zealand
Credit Facility, 7 year term
expiring March 2004, interest at
local Bill Rate plus .7% 42,745 58,727
$9,575,000 Canadian Credit Facility,
5 year term expiring March 2002,
interest at Canadian prime rate,
LIBOR plus .425% or Canadian
Bankers Acceptance plus .425% 3,424 8,619
Other 5,269 3,932
- --------------------------------------------------------------------------------
241,438 233,278
Less current maturities (3,384) (2,811)
- --------------------------------------------------------------------------------
Senior Debt 238,054 230,467
Subordinated Debt(b):
7 1/4% Senior Notes Due 2007 150,000 150,000
- --------------------------------------------------------------------------------
$388,054 $380,467
================================================================================
(a) The Company's revolving credit facility is unsecured and requires no
compensating balance, however it does have certain restrictive covenants,
the most significant of which relates to the ratio of debt to equity,
dividend payments and stock repurchases.
The seven-year $59,354,000 Australian and New Zealand credit facility is
composed of two parts; one of which was used to acquire the NationalPak
business (see Note 4) and a second part that can be used for working capital
needs. There are fixed periodic payments associated with the acquisition
borrowing and the working capital borrowing can be drawn on and repaid at
NationalPak's discretion. The facility is secured by the accounts
receivable, inventory and fixed assets of NationalPak.
The five-year $9,575,000 Canadian credit facility requires fixed periodic
payments. The facility is secured by the accounts receivable, inventory and
fixed assets of the Canadian business.
(b) The $150,000,000, 7 1/4% Senior Notes (the "7 1/4% Notes") which were issued
during fiscal 1997 will become due on March 1, 2007. Proceeds from the sale
of the 7 1/4% Notes were used to redeem all of the Company's previously
issued 9 1/8% Senior Subordinated Notes (the "9 1/8% Notes") and to reduce
bank debt. The write-off of unamortized issuance costs and other expenses
associated with the repurchase of the 9 1/8% Notes was recorded as an
extraordinary charge on the Company's Consolidated Statement of Income.
The 7 1/4% Note Indenture contains certain restrictive covenants and
limitations the most significant of which relates to the Company's right to
incur debt and to engage in certain sale and leaseback transactions.
First Brands was in compliance with all the covenants of the senior and
subordinated debt agreements at June 30, 1998.
Principal payments due on long-term debt (including current maturities)
will require the following future payments: $3,384,000 in fiscal 1999,
$4,223,000 in fiscal 2000, $4,834,000 in fiscal 2001, $199,002,000 in fiscal
2002, $6,309,000 in fiscal 2003 and $173,686,000 thereafter.
12. Leases
During fiscal 1998, the Company acquired all remaining domestic production
equipment which had been previously leased. These assets were associated with
sale and leaseback agreements and were classified as operating leases in
accordance with SFAS No. 13 "Accounting for Leases."
The Company leases various warehousing, production and office facilities
under operating lease agreements. Lease terms generally range from one to
fifteen years with options to renew.
Lease commitments under non-cancelable operating leases extending for one
year or more require the following future payments: $5,955,000 in 1999,
$5,200,000 in 2000, $4,680,000 in 2001, $4,185,000 in 2002, $3,950,000 in 2003
and $13,785,000 thereafter. The total rental expense under operating leases was
$10,338,000, $16,035,000 and $20,856,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
13. Capital Stock
First Brands has four stock option plans ("the plans") three of which are for
certain key employees and one for non-employee directors. The plans' objectives
are to establish a direct link between the financial interest of eligible
employees and the performance of the Company and to attract and retain the most
qualified personnel. Stock options are primarily performance-based and have
terms that are not more than ten years from the date of grant. The exercise
price for
26
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
stock options may not be less than the fair market value of the Common Stock on
the date of grant and such options will vest over a period determined by the
Compensation Committee of the Board of Directors. As of June 30, 1998, the total
number of options available for grant are 2,017,652.
Options granted to certain personnel contain restricted and limited stock
appreciation rights ("LSAR's"). LSAR's may be granted in tandem with a stock
option grant or at any time following the stock option grant and are only
exercisable upon a change of control of the Company. LSAR's will exercise
automatically following certain changes in control of the Company, and upon such
exercise the grantee, in cancellation of the underlying stock options, will
receive cash equal to the excess of the fair market value of each share of
Common Stock subject to the limited stock appreciation right over the exercise
price of the underlying stock option. LSAR's have been granted with respect to
1,288,000 shares.
A summary of the options transactions for the years ended June 30, 1998,
1997 and 1996 follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Options outstanding,
beginning of fiscal
year 3,257,472 2,943,822 2,613,380
Options granted--
per share
$22.53-$28.25 20,000 573,000 669,000
Options exercised--
per share
$9.50-$22.52 (159,802) (253,350) (328,558)
Options canceled--
per share
$16.38-$28.25 (26,500) (6,000) (10,000)
- --------------------------------------------------------------------------------
Options outstanding,
end of fiscal year 3,091,170 3,257,472 2,943,822
- --------------------------------------------------------------------------------
Exercisable at June 30 1,934,670 2,028,472 2,287,822
================================================================================
The following tables set forth information regarding stock options
outstanding and those options which are exercisable as of June 30, 1998:
OPTIONS Weighted Weighted
OUTSTANDING Stock Average Average
Range of Options Exercise Remaining
Exercise Prices Outstanding Price Life
- -----------------------------------------------------------------------------
$9.50-$12.66 699,170 $11.81 2.7
$14.66-$22.60 1,786,000 $18.03 6.2
$26.00-$28.25 606,000 $25.87 8.8
- -----------------------------------------------------------------------------
3,091,170 $18.16 5.9
=============================================================================
OPTIONS Weighted
EXERCISABLE Stock Average
Range of Options Exercise
Exercise Prices Exercisable Price
- -------------------------------------------------------------------------------
$9.50-$12.66 699,170 $11.81
$14.66-$22.60 1,192,500 $15.79
$26.00-$28.25 43,000 $23.84
- -------------------------------------------------------------------------------
1,934,670 $14.53
===============================================================================
The Company adopted the disclosure-only provision of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for its time vested option plans. If the Company had elected to
adopt the recognition provision of SFAS No. 123, income and per share amounts
would be the following:
1998 1997 1996
- --------------------------------------------------------------------------------
Income before
extraordinary loss and
accounting change:
As reported $52,330 $50,865 $65,100
Pro forma 51,744 50,265 64,461
Basic earnings per share:
As reported $ 1.32 $ 1.25 $ 1.56
Pro forma 1.31 1.23 1.55
Diluted earnings per share:
As reported $ 1.29 $ 1.22 $ 1.53
Pro forma 1.28 1.20 1.51
================================================================================
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model based on the following weighted-average
assumptions:
1998 1997 1996
- -------------------------------------------------------------------------------
Dividend yield 1.5% 1.3% 1.3%
Risk free interest rate 5.5% 5.3% 5.3%
Expected volatility rate 42.6% 25.8% 21.9%
Expected life 7.7 years 7.6 years 7.3 years
===============================================================================
14. Income Taxes
The geographic components of earnings before income taxes, extraordinary loss
and cumulative change in accounting principle are as follows:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
United States $74,951 $75,790 $100,236
International 9,743 7,608 8,683
- --------------------------------------------------------------------------------
$84,694 $83,398 $108,919
================================================================================
27
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Total income taxes for the years ended June 30, 1998, 1997 and 1996 were
allocated as follows:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Income before
extraordinary loss and
cumulative change in
accounting principle $32,364 $32,533 $43,819
Extraordinary loss -- (415) --
Cumulative change in
accounting principle (4,512) -- --
Stockholders' equity, for
compensation expense
for tax purposes in
excess of amounts
recognized for financial
reporting purposes (1,071) (1,212) (1,256)
- --------------------------------------------------------------------------------
$26,781 $30,906 $42,563
================================================================================
Income tax expense attributable to income before extraordinary loss and
cumulative change in accounting principle for the years ended June 30, 1998,
1997 and 1996 consists of the following:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $ 6,765 $20,418 $11,640
State 1,071 3,539 2,566
Foreign 4,806 2,768 3,805
- -------------------------------------------------------------------------------
Total current 12,642 26,725 18,011
- -------------------------------------------------------------------------------
Deferred:
Federal 17,037 4,638 20,916
State 3,355 1,028 5,275
Foreign (670) 142 (383)
- -------------------------------------------------------------------------------
Total deferred 19,722 5,808 25,808
- -------------------------------------------------------------------------------
$32,364 $32,533 $43,819
===============================================================================
The fiscal 1998 increase in deferred income tax expense and decrease in
current income tax expense relate primarily to information system expenditures,
restructuring charges and changes in various accruals.
Income tax expense attributable to income before extraordinary loss differs
from the amounts computed by applying the U.S. federal tax rate of 35 percent to
pre-tax income before extraordinary loss as a result of the following:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Computed "expected"
tax expense $29,643 $29,189 $38,122
Adjustments resulting
from:
Amortization of
goodwill 788 703 440
State income taxes,
net of federal
income tax benefit 2,877 2,919 4,713
Foreign income tax in
excess of statutory
rate 726 238 478
Other, net (1,670) (516) 66
- --------------------------------------------------------------------------------
Actual tax expense $32,364 $32,533 $43,819
================================================================================
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997 are presented below:
(In thousands) 1998 1997
- -------------------------------------------------------------------------------
Current deferred tax assets:
Accounts receivable reserves $ 2,557 $ 2,969
Difference between book and
tax basis of inventories 3,539 3,882
Accrued liabilities, not
deductible until paid 5,731 9,141
- -------------------------------------------------------------------------------
Total current deferred tax assets 11,827 15,992
- -------------------------------------------------------------------------------
Long-term deferred tax assets:
Pensions, other post employment
benefits and deferred
compensation 9,127 6,423
Intangible asset, not
amortized for tax 7,344 7,374
- -------------------------------------------------------------------------------
Total long-term deferred tax assets 16,471 13,797
- -------------------------------------------------------------------------------
Long-term deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation (82,472) (73,373)
Deferred charges, principally
purchase accounting and
information systems (11,715) (4,110)
Foreign subsidiaries (1,072) (1,662)
- -------------------------------------------------------------------------------
Total long-term deferred
tax liabilities (95,259) (79,145)
- -------------------------------------------------------------------------------
Long-term deferred tax
liability, net (78,788) (65,348)
- -------------------------------------------------------------------------------
Net deferred tax liability $(66,961) $(49,356)
================================================================================
28
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Management of the Company has determined, based on the Company's history of
operating earnings and its expected income, that operating income will more
likely than not be sufficient to fully utilize these deferred tax assets as they
mature.
The Company has not provided for Federal income taxes on the undistributed
income of its international subsidiaries because it is the Company's intention
to reinvest such undistributed income. Cumulative undistributed earnings for
which no U.S. tax has been provided were $51,403,000, $48,787,000 and
$44,921,000 for the years ended June 30, 1998, 1997 and 1996 respectively.
15. Employee Benefits
Retirement Plans
In the U.S., First Brands maintains a non-contributory defined benefit
retirement plan ("pension plan") for some employees and a defined contribution
pre and post-tax savings plans ("savings plan") for all employees.
The Company contributes to the savings plan account of each eligible
employee. Any regular employee of First Brands or its domestic subsidiaries is
eligible to participate in the amended savings plan. The Company matches 50% of
employee contributions up to the lower of statutory limits or 3% of base pay.
Savings plan expense for the years ended June 30, 1998, 1997 and 1996 totaled
$2,442,000, $2,194,000 and $2,028,000, respectively. The Company also maintains
a noncontributory profit sharing plan, to which it provides a profit sharing
contribution to each eligible employee's account in the savings plan. The
contribution is discretionary and is based on the Company's operating
performance. The Company's profit sharing contributions are in the form of
existing issued and outstanding shares of First Brands Common Stock. The costs
associated with the profit sharing plan were approximately $423,000, $445,000
and $730,000 for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
The pension plan for First Brands in the U.S., and certain of its
international subsidiaries provides defined benefits that are based on years of
credited service, highest average compensation (as defined) and the primary
social security benefit. Beginning January 2000, in the U.S. the pension plan
formula changes to a defined benefit plan based on years of credited service and
career average compensation. Pension plan assets primarily consist of corporate
equities, as well as corporate and government fixed income obligations.
Contributions to the plan are based upon the projected unit credit actuarial
cost funding method and are limited to amounts that are currently deductible for
tax purposes. Prior service costs are amortized on a straight-line basis over
the average remaining service period for active plan participants.
The Company's U.S. early retirement program (see Note 3) resulted in a
special actuarial termination charge of $1,400,000 for fiscal 1997. This charge
was increased by an additional $28,000 during fiscal 1998 to reflect actual
participation in the early retirement program. The Company's Canadian subsidiary
terminated its defined pension plan and transferred all eligible employees to a
new group registered retirement savings plan ("RRSP") which provides essentially
the same benefits as the former plan. As a result of the plan termination, the
Company recognized a $530,000 curtailment gain during fiscal 1997. Costs
associated with the Canadian RRSP were approximately $250,000 for fiscal 1998.
The following table sets forth the combined domestic and international
plans' net pension cost, funded status and amounts recognized in the Company's
Consolidated Financial Statements at June 30, 1998, 1997 and 1996:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net pension cost
included the following
components:
Service cost--
benefits earned
during the period $ 3,229 $ 3,275 $ 3,455
Interest cost on
projected benefit
obligations 6,307 6,177 4,984
Actual return on plan
assets (6,724) (6,898) (6,838)
Net amortization and
deferral (797) (816) (81)
Cost of Special
termination benefit 28 1,400 --
Curtailment (gain) -- (530) --
- --------------------------------------------------------------------------------
$ 2,043 $ 2,608 $ 1,520
================================================================================
29
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Reconciliation of funded status:
Vested accumulated benefit
obligation $ 74,250 $ 57,755
Non-vested accumulated benefit
obligation 8,104 6,753
- --------------------------------------------------------------------------------
Accumulated benefit obligation 82,354 64,508
Additional liability based on
projected compensation 14,793 18,251
- --------------------------------------------------------------------------------
Projected benefit obligation 97,147 82,759
Fair value of plan assets 89,489 80,375
- --------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation 7,658 2,384
Unrecognized prior service
benefit 6,940 7,577
Unrecognized net (loss) (3,499) (407)
- --------------------------------------------------------------------------------
Net pension liability recognized in
the consolidated balance sheet 11,099 9,554
================================================================================
To calculate the expense and liability associated with its pension plans,
the Company utilizes the following assumptions:
1998 1997 1996
- -----------------------------------------------------------------------------
DOMESTIC
Discount rate 7.0% 8.0% 8.0%
Compensation
increase rate 4.0% 4.5% 4.5%
Expected long-term
return on plan assets 9.5% 9.5% 9.5%
INTERNATIONAL
Discount rate 5.5% 6.0%-8.5% 8.5%
Compensation
increase rate 4.0% 4.0%-5.0% 5.0%
Expected long-term
return on plan assets 7.0% 7.5%-8.5% 8.5%
- -----------------------------------------------------------------------------
In the U.S. federal law restricts the amount of benefits that can be paid
from a qualified plan. First Brands maintains an unfunded non-qualified plan,
the effect of which is to award retirement benefits to all employees on a
uniform basis. Expenses associated with this plan were $485,000, $564,000,
$297,000 during 1998, 1997 and 1996, respectively.
Postretirement Benefits
The Company provides certain medical and life insurance benefits for retirees
and their dependents in the United States. Employees who have reached the age of
55, and have met the Company's minimum service requirements, become eligible for
these benefits. The medical and life insurance benefits available are partially
contributory in nature, and it is the Company's practice to fund these benefits
as incurred. Retirees outside the United States are generally covered by locally
sponsored government programs.
Following is an analysis of postretirement benefit costs for fiscal 1998,
1997 and 1996:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 274 $ 370 $ 297
Interest cost 1,371 1,129 1,112
Unrecognized net (gain) -- (36) --
Amortization of prior
service cost 92 92 --
Amortization of
transition obligation 583 583 583
- --------------------------------------------------------------------------------
Net postretirement
benefit cost 2,320 2,138 1,992
Cost of special
termination benefit 183 1,600 --
- --------------------------------------------------------------------------------
$ 2,503 $ 3,738 $ 1,992
================================================================================
During fiscal 1997, the Company announced an early retirement program (see
Note 3) for which it recorded a special actuarial termination charge of
$1,600,000. This charge was increased by an additional $183,000 during fiscal
1998 to reflect actual participation in the early retirement program.
The Company's accumulated postretirement benefit obligation (the transition
obligation) at June 30, 1998 and 1997 is composed of the following components:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 13,551 $ 7,926
Fully eligible active plan
participants 1,033 3,011
Active plan participants not
fully eligible 5,157 5,770
- --------------------------------------------------------------------------------
Total 19,741 16,707
Unrecognized transition obligation (8,798) (9,381)
Unrecognized prior service cost (1,140) (1,232)
Unrecognized gain (loss) (115) 2,202
- --------------------------------------------------------------------------------
Accrued unfunded postretirement
benefit cost $ 9,688 $ 8,296
================================================================================
The discount rate used in determining the accumulated postretirement
benefit obligation was 7% and 8% for fiscal 1998 and 1997, respectively. The
assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation was 9.5% in 1998 and is expected to gradually
decline .5% per year to an ultimate rate of 5% in fiscal year 2007. A 1%
increase in the assumed health care cost trend rate for each year would increase
the accumulated
30
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
postretirement benefit obligation as of June 30, 1998 by $670,000 and increase
the service and interest cost for 1998 by $62,000.
16. Commitments, Contingencies and Related Parties
Litigation
The Company is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, arising from
these claims and contingencies is not likely to have a material adverse effect
on the Company's annual results of operations or financial condition.
Related Parties
Beginning in January, 1997, Alfred E. Dudley, a Director and former Chairman of
the Company, was retained as a consultant. For these services, he was paid a
yearly consulting fee of $100,000 in fiscal 1998 and 1997.
The Company has utilized the services of Lee Hill Incorporated, a marketing
services company, of which James R. McManus, a Director of First Brands, was the
owner. For fiscal 1998 the total fees paid to Lee Hill Incorporated were
$118,000. During September 1997, Mr. McManus sold his interest in Lee Hill.
The Company believes that each of the related party transactions described
above were on terms as fair to the Company as could have been obtained from
unaffiliated third parties.
Other
The Company is a party to a contract with Union Carbide that provides for the
purchase of a substantial portion of the Company's primary raw material
requirements for plastic wrap and bags through December 31, 1999. The pricing
provisions in the Company's present supply contracts are designed to be
responsive to market conditions of the relevant raw materials.
17. Geographic Segment Data
The following is a summary of net sales, operating profit, and identifiable
assets in the United States and internationally in 1998, 1997 and 1996:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Revenues:
United States $ 972,638 $ 954,411 $ 932,183
International 231,032 165,487 140,839
- -------------------------------------------------------------------------------
$ 1,203,670 $ 1,119,898 $ 1,073,022
===============================================================================
Operating profit:
United States $ 118,663 $ 130,032 $ 135,500
International 23,493 15,355 12,513
Less Corporate
Expense (20,097) (20,189) (19,412)
Restructuring
Expense (2,700) (19,000) --
- --------------------------------------------------------------------------------
$ 119,359 $ 106,198 $ 128,601
================================================================================
Identifiable assets:
United States $ 876,092 $ 835,821 $ 775,447
International 184,109 210,960 85,433
- --------------------------------------------------------------------------------
$ 1,060,201 $ 1,046,781 $ 860,880
================================================================================
Operating profit reflects net sales less cost of goods sold, selling,
general and administrative expenses, amortization and other depreciation and
restructuring expenses.
Included in U.S. revenues are export sales totaling $36,780,000,
$42,076,000 and $37,055,000 during the years ended June 30, 1998, 1997 and 1996,
respectively. The Company does not believe that it is dependent on any single
customer, however, net sales to its largest customer accounted for approximately
12% of total sales for the years ended June 30, 1998, 1997 and 1996.
18. Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of prior year financial statements is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which expands annual financial statement
disclosures about operating segments and establishes disclosure requirements
concerning a company's products, customers and geographic areas. Selected
information about operating segments is also required for interim financial
reports issued to shareholders. Financial statement disclosures for prior
periods are required to be restated.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the disclosure
requirements previously established by SFAS No. 87, 88 and 106. The new
disclosure requirements are intended to
31
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
standardize the reporting of pensions and other postretirement benefits. While
SFAS No. 132 does not change the measurement or recognition requirements of
those plans, it does require some new information from plan sponsors and allows
for the elimination of other information which is no longer considered useful.
Restatement of disclosure for earlier periods is required, unless such
information is not readily available.
The Company plans to adopt each of the above pronouncements in its fiscal
year beginning July 1, 1998. While the adoption of SFAS No. 130, 131 and 132
will have no impact on First Brands results of operations, cash flows or
financial position, the Company is currently evaluating the appropriate format
of disclosure for each pronouncement.
19. Subsequent Event
On July 2, 1998, the Company entered into an agreement to acquire, for
approximately $53,000,000, the HANDI WIPES and WASH 'N DRI brands from the
Colgate-Palmolive Company. The acquisition, which will be accounted for as a
purchase, is expected to be completed during the first quarter of fiscal 1999
and will be financed through borrowings from the Company's revolving credit
facility.
20. Quarterly Financial Data (Unaudited)
Year Ended June 30, 1998
Quarters Ended
--------------------------------------------------------
(In thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1997 1997 1998 1998
- --------------------------------------------------------------------------------
Net sales $269,480 $309,282 $296,414 $328,494
Gross profit 86,285 112,288 105,436 123,791
Income before
cumulative
change(a) 12,173 13,307 16,038 10,812
Net income 12,173 6,385 16,038 10,812
Per common
share:
Basic
Income
before
cumulative
change(a) $0.30 $0.33 $0.41 $0.28
Net income $0.30 $0.16 $0.41 $0.28
- --------------------------------------------------------------------------------
Diluted
Income
before
cumulative
change(a) $0.30 $0.33 $0.40 $0.27
Net income $0.30 $0.16 $0.40 $0.27
================================================================================
Year Ended June 30, 1997
Quarters Ended
--------------------------------------------------------
(In thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1996 1996 1997 1997
- --------------------------------------------------------------------------------
Net sales $255,597 $279,952 $264,886 $319,463
Gross profit 88,189 101,719 96,122 120,182
Income before
extraordinary
loss(a) 18,007 15,351 16,054 1,453
Net income 18,007 15,351 15,421 1,453
Per common
share:
Basic
Income
before
extraordinary
loss(a) $0.44 $0.38 $0.40 $0.04
Net income $0.44 $0.38 $0.38 $0.04
- --------------------------------------------------------------------------------
Diluted
Income
before
extraordinary
loss(a) $0.43 $0.37 $0.39 $0.04
Net income $0.43 $0.37 $0.37 $0.04
================================================================================
(a) The fourth quarter of fiscal 1997 and the second quarter of fiscal 1998,
include a $19,000 and $2,700 charge for restructuring expenses,
respectively.
32
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
FIRST BRANDS CORPORATION:
Under date of August 6, 1998, we reported on the consolidated balance
sheets of First Brands Corporation and subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1998 as referenced in the annual report on Form 10-K for the year 1998, which
report refers to a change in the method of accounting for business process
re-engineering cost. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in Item 14 of the annual report on Form 10-K for
the year 1998. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
...............................
KPMG PEAT MARWICK LLP
New York, New York
August 6, 1998
33
SCHEDULE VIII
FIRST BRANDS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF PERIOD EXPENSES DEDUCTIONS(a) OF PERIOD
---------- ---------- ------------- ---------
(IN THOUSANDS)
FOR THE YEAR ENDED JUNE 30, 1998
------------------------------------------------------
Allowance for doubtful accounts and discounts................. $ 11,599 $ 41,517 $ (42,292) $10,824
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
FOR THE YEAR ENDED JUNE 30, 1997
------------------------------------------------------
Allowance for doubtful accounts and discounts................. $ 9,552 $ 39,732 $ (37,685) $11,599
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
FOR THE YEAR ENDED JUNE 30, 1996
------------------------------------------------------
Allowance for doubtful accounts and discounts................. $ 8,498 $ 36,590 $ (35,536) $ 9,552
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
- ------------
(a) Deductions represent write-offs and discounts net of recoveries of amounts
previously written off.
34
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BRANDS CORPORATION
By /s/ JOSEPH B. FUREY
..................................
JOSEPH B. FUREY
VICE PRESIDENT AND CONTROLLER
August 5, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has also been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/S/ WILLIAM V. STEPHENSON Chairman, President, Chief Executive Officer August 5, 1998
......................................... and Director
(WILLIAM V. STEPHENSON)
/S/ THOMAS H. ROWLAND Executive Vice President and Director August 5, 1998
.........................................
(THOMAS H. ROWLAND)
/S/ DONALD A. DESANTIS Senior Vice President and Chief Financial August 5, 1998
......................................... Officer
(DONALD A. DESANTIS)
/S/ ROBERT E. BERNSTOCK Director August 5, 1998
.........................................
(ROBERT E. BERNSTOCK)
/S/ ALFRED E. DUDLEY Director August 5, 1998
.........................................
(ALFRED E. DUDLEY)
/S/ JOHN C. FERRIES Director August 5, 1998
.........................................
(JOHN C. FERRIES)
/S/ JAMES R. MAHER Director August 5, 1998
.........................................
(JAMES R. MAHER)
/S/ JAMES R. MCMANUS Director August 5, 1998
.........................................
(JAMES R. MCMANUS)
/S/ DENIS NEWMAN Director August 5, 1998
.........................................
(DENIS NEWMAN)
/S/ ERVIN R. SHAMES Director August 5, 1998
.........................................
(ERVIN R. SHAMES)
/S/ ROBERT G. TOBIN Director August 5, 1998
.........................................
(ROBERT G. TOBIN)
35
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 -- Restated Certificate of Incorporation of the Company, as amended
to November 6, 1996. Incorporated by reference to Exhibit 4(a) to
the Company's Registration Statement on Form S-8 filed by the
Company on February 3, 1997.
3.2 -- By-Laws of the Company, as amended to January 20, 1995.
Incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995
(Commission File No. 1-10395).
4.1 -- Indenture dated as of March 1, 1997 between the Company and The
Bank of New York, relating to the 7.25% Senior Notes due 2007.
Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 filed by the Company on April
24, 1997.
4.2 -- Purchase Agreement dated as of March 5, 1997 among the Company,
Bear Stearns & Co. Inc., TD Securities (USA) Inc., Credit
Lyonnais Securities (USA) Inc. and First Union Capital Markets
Corp., relating to the 7.25% Senior Notes due 2007. Incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 filed by the Company on April 24, 1997.
4.3 -- Registration Rights Agreement dated as of March 5, 1997 among the
Company, Bear Stearns & Co. Inc., TD Securities (USA) Inc.,
Credit Lyonnais Securities (USA) Inc. and First Union Capital
Markets Corp., relating to the 7.25% Senior Notes due 2007.
Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 filed by the Company on April
24, 1997.
4.4 -- Rights Agreement, dated as of March 22, 1996, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent,
including the form of Certificate of Designation, Preferences and
Rights of Junior Participating Preferred Stock, Series A,
attached thereto as Exhibit A, the form of Rights Certificate
attached thereto as Exhibit B and the Summary of Rights attached
thereto as Exhibit C. Incorporated by reference to Exhibit 1.1 to
the Company's Registration Statement on Form 8-A dated March 22,
1996.
10.1 -- Amended and Restated Credit Agreement, dated as of February 28,
1997, among the Company, The Chase Manhattan Bank, as Agent, and
The Several Lenders Parties thereto. Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-4
filed by the Company on April 24, 1997.
10.2* -- Receivables Purchase Agreement, dated as of June 5, 1998, among
the Company, First Brands Funding Inc., Market Street Funding
Corporation and PNC Bank, National Association, relating to the
Company's trade receivables-backed financing.
10.3* -- Purchase and Sale Agreement, dated as of June 5, 1998, among the
Company, A & M Products Inc., Himolene Incorporated and First
Brands Funding Inc., relating to the Company's trade
receivables-backed financing.
10.4 -- Amended Long-Term Incentive Plan. Incorporated by reference to
Exhibit 10.34 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990 (Commission File No. 1-10395).
36
10.5 -- First Brands Corporation 1994 Performance Stock Option and
Incentive Plan. Incorporated by reference to Exhibit A to the
Definitive Proxy Statement for Annual Meeting of Stockholders,
filed by the Company on September 28, 1993 (Commission File No.
1-10395).
10.6 -- First Brands Corporation Non-Employee Directors Stock Option
Plan. Incorporated by reference to Exhibit A to the Definitive
Proxy Statement for Annual Meeting of Stockholders, filed by the
Company on September 26, 1995 (Commission File No. 1-10395).
10.7 -- First Brands Corporation Annual Incentive Plan. Incorporated by
reference to Exhibit A to the Definitive Proxy Statement for
Annual Meeting of Stockholders, filed by the Company on September
26, 1995 (Commission File No. 1-10395).
10.8 -- First Brands Corporation 1998 Performance Stock Option and
Incentive Plan. Incorporated by reference to Exhibit A to the
Definitive Proxy Statement for Annual Meeting of Stockholders,
filed by the Company on September 26, 1997 (Commission File No.
1-10395).
10.12 (a)-- Purchase and Sale Agreement, dated as of June 30, 1994, between
the Company and Vestar/Freeze Holdings Corporation and Vestar
Equity Partners, L.P., relating to the sale by the Company of its
businesses of developing, manufacturing, marketing, selling
and/or distributing automotive antifreeze, cooling system tools,
cooling system chemicals for cleaning and sealing leaks in
automotive cooling systems, ice-fighting products, PRESTONE brake
fluid products, PRESTONE power steering fluid products, and
PRESTONE transmission stop leak fluid products, and antifreeze
recycling business. Incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K, filed by the Company on
September 12, 1994 (Commission File No. 1-10395).
(b)-- Amendment No. 1 thereto, dated as of August 25, 1994.
Incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed by the Company on September 12, 1994
(Commission File No. 1-10395).
11* -- Computation of Net Income Per Common Share.
21* -- Subsidiaries of Registrant.
23* -- Consent of KPMG Peat Marwick.
27* -- EDGAR Financial Data Schedule.
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* Filed herewith
37
STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as............................... 'SS'